Study of Nifty Derivatives & Risk Minimization Trading Strategy

A

Project

On

Study of Nifty Derivatives

&

Risk Minimization Trading Strategy

IN PARTIAL FULFILMENT FOR THE REQUIREMT OF THE PROJECT STUDY COURSE OF TWO YEAR (FULL TIME) M.B.A. PROGRAMME

N.R. Institute of Business Management

Batch :2008-2010

Submitted by: Guided by:Ankit Shah (08091) Prof. Anjali Choksi Ashish Ashara (08004)

N.R.INSTITUTE OF BUSINESS MANAGEMENT

N. R. Institute of Business Management

CERTIFICATE FROM INSTITUTE

This is to certify that Mr. Ankit Shah and Mr.

Ashish Ashara, students of MBA (2008-10 batch) at N.R.

Institute of Business Management, Gujarat University,

Ahmedabad have prepared a Grand Project on “Study of

Nifty Derivatives & Risk Minimization Trading

Strategies” in partial fulfillment of two years full-time

MBA Program of Gujarat University. This project work has

been undertaken under the guidance of Prof. Anjali

Choksi, core faculty at N.R. Institute of Business

Management, Gujarat University, Ahmedabad.

This is also to ascertain that this project has been

prepared only for the award of MBA degree and has not

been submitted for any other purpose.

Dr. Hitesth Ruparel Prof. Anjali

Choksi


Director Core faculty

_________________ _________________

Date: 20/03/2010

Place: Ahmedabad


PREFACE

Derivatives occupy a very significant place in the field of finance and are

virtually driving the global financial markets of the day. Several markets of

the world have witnessed a phenomenal rise in trading derivative

instruments over a past three decades.

With the world embracing the derivatives trading on a large scale, the Indian

market obviously cannot remain aloof, especially after liberalization has

been set in motion.

Derivatives are like a deep ocean of knowledge for the learners of finance.

The reason to choose this subject was the emergence of derivatives trading

in the different sectors of the Indian economy. Derivatives are the means to

achieve the objectives like risk management by fund managers and hedging

by traders. By looking at the importance of the derivatives we make an

attempt to determine the trend of Nifty and on the basis of that framing

trading strategies to minimize the risk while maximize the profit exposure.

This project would be a powerful base for us to undergo further studies in the

risk management field and even in the field of finance as a whole.

ACKNOWLEDGEMENT


Motivation and co-operation are the main two pillars on which the

success of any project relies. So first of all we would like to thank

core faculty and our project guide Prof . Anjali Choksi who made

us aware about the project and motivated us to work on the

guidelines of this unique, new and knowledge based project. She

has guided us at each and every stage of the project. She has

been enthusiastically involved in every aspects of the project.

Overall we are highly indebted to her for all the knowledge,

guidance and motivation that she has provided us throughout our

project.

We would also like to thank our friends and those who have helped

us during this project directly or indirectly.

Every person wants to prove himself in this fast, dynamic and cut-

throat competitive world. When he/she gets an opportunity to do

so then he or she will find that success is very near to him/her.

So, we would like to acknowledge our thanks to our Director

Prof. Hitesh Ruparel who gave us opportunity to prove

ourselves. We also would like to express our gratitude to our

project Co-ordinator Mr.Sunil c.Shah (Vice-president Arcadia

Shares & stock Brokers pvt ltd & Mr. Kalpesh d.Shah

(Business Associate- Arcadia shares & stock brokers Pvt

ltd) and the Manager of Arcadia Shares & stock brokers Pvt

Ltd. for their kind support and assistance.

ANKIT SHAH

ASHISH ASHARA


EXECUTIVE SUMMARY

One of the interesting developments in financial markets over the last 15 to 20 years has been the growing popularity of derivatives or contingent claims. In many situations, both hedgers and speculators find it more attractive to trade a derivative on an asset than to trade the asset itself. Some derivatives are traded on exchanges. Others are made available to corporate clients by financial institutions or added to new issues of securities by underwriters.

In this report we have included history of Derivatives. Than we have included

Derivatives Market in India. Than after we have included stock market

Derivatives.

In this report we have taken a first look at forward, futures and options contracts. A forward or futures contract involves an obligation to buy or sell an asset at a certain time in the future for a certain price. There are two types of options: calls and puts. A call option gives the holder the right to buy an asset by a certain date for a certain price. In India the derivatives market has grown very rapidly. There are mainly three types of traders: hedgers, speculators and arbitrageurs.

In the next section, we have tried to determine the study of Nifty derivatives for the short term period using the two important indicators namely Open Interest & Put/Call Ratio. In which Put/Call Ratio analysis proves to be more effective indicators. Moreover in the analysis of Put/Call Ratio, Combination of Open Interest & Volume gives more accurate results.

In the last section, we have determined different trading strategies for different market views i.e. Bullish, Bearish, Range bound & Volatile. On the basis of investors’ perceptions they can use suited strategies which will minimize the loss. There are also some arbitrage strategies prevailing in the market like reversal, conversion etc. which give fix amount of profit irrespective of market movements but it is not readily available in the market but one has to grab such Opportunities.

PLACE: AHMEDABADDATE : 20/03/2010


INDEX

Sr.

no Topics Pg.

no.

1INTRODUCTION TO INDIAN CAPITAL MARKET 1

2 INTRODUCTION TO DERIVATIVES 4

3 DEVELOPMENT OF DERIVATIVES MARKET IN INDIA

9

4 RESEARCH METHODOLOGY 12

5 STOCK MARKET DERIVATIVES 15

6 INTRODUCTION TO FUTURES 19

7 INTRODUCTION TO OPTIONS 37

8 INDICATORS OF INVESTING IN FUTURES & OPTION

62

9 OPEN INTEREST 64

10 PUT/CALL RATIO 68

11

ANALYSIS[a]STUDY OF SHORT TERM TREND OF NIFTY DERIVATIVES USING:

Open Interest Put/Call Ratio

[b]RISK MINIMIZATION TRADING STRATEGIES USING FUTURES & OPTION

71

FINDINGS 177


CONCLUSION 179

BIBLIOGRAPHY180

GLOSSARY181


CHAPTER1

INTRODUCTION TOCAPITAL


CH. 1 INTRODUCTION TO INDIAN CAPITAL MARKET

CAPITAL MARKET In today’s era investor invest their funds after basic analysis. The basic function of financial market is to facilitate the transfer of funds from surplus sectors that is from (lenders) to deficit sectors (borrowers). If we look at the financial cycle then we can say that households make their savings, which is provided to industrial sectors, which earn profit and finally this profit will go to the households in the form of interest and dividend. Indian Financial System is made-up of 2 types of markets i.e. Money market & Capital Market. The money market has 2 components-The organized & unorganized. The organized market is dominated by commercial banks. The other major participants are RBI, LIC, GIC, UTI, and STCI. The main function of it is that of borrowing & lending of short term funds. On the other hand unorganized money market consists of indigenous bankers & money lenders. This sector is continuously providing finance for trade as well as personal consumption.

Capital MarketPrimary Market

Secondary Market

To create funds, new firms use Primary Market by publishing their issues in

different instruments. On the other hand Secondary Market provides base

for trading and securities that have already been issued.

PAST OF SHARE MARKET

Before 1996, all the transactions were done through physical form in security market. Because of physical form investors were facing so many problems.At that time the certificates were transferred to the purchase holder. On the other hand they are now transferred directly in their electronic form which is much more quicker and safer.


BSE

The Stock Exchange, Mumbai, popularly known as "BSE" was established in

1875 as "The Native Share and Stock Brokers Association". It is the

oldest one in Asia, even older than the Tokyo Stock Exchange, which was

established in 1878. It is a voluntary non-profit making Association of

Persons (AOP) and is currently engaged in the process of converting itself

into demutualised and corporate entity. It has evolved over the years into its

present status as the premier Stock Exchange in the country. It is the first

Stock Exchange in the Country to have obtained permanent recognition in

1956 from the Govt. of India under the Securities Contracts (Regulation) Act,

1956.

NSE

To obviate the problem, RELATED TO PHYSICAL FORM the NSE introduced screen based trading system (SBTC) where a member can punch into the computer the quantities of shares & the prices at which he wants to transact.


CAHPTER2

INTRODUCTION TODERIVATIVES

CH 2 INTRODUCTION TO DERIVATIVES


The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfilment to the value of a specified real or financial asset or to an index of securities.

Derivatives in mathematics, means a variable derived from another variable. Similarly in the financial sense, a derivative is a financial product, which has been derived from a market for another product. Without the underlying product, derivatives do not have any independent existence in the market.

Derivatives have come into existence because of the existence of risks in business. Thus derivatives are means of managing risks. The parties managing risks in the market are known as HEDGERS. Some people/organisations are in the business of taking risks to earn profits. Such entities represent the SPECULATORS. The third player in the market, known as the ARBITRAGERS take advantage of the market mistakes.

The need for a derivatives market

The derivatives market performs a number of economic functions:

1. They help in transferring risks from risk averse people to risk oriented people.

2. They help in the discovery of future as well as current prices.3. They catalyze entrepreneurial activity.4. They increase the volume traded in markets because of participation of

risk-averse people in greater numbers.5. They increase savings and investment in the long run.

Factors driving the growth of financial derivatives1. Increased volatility in asset prices in financial markets,2. Increased integration of national financial markets with the

international markets,


3. Marked improvement in communication facilities and sharp decline in their costs,

4. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and

5. Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets.

A derivative is a financial instrument whose value depends on the value of other, more basic underlying variables. The main instruments under the derivative are:1. Forward contract 2. Future contract3. Options4. Swaps

1. Forward Contract:

A forward contract is a particularly simple derivative. It is an agreement to buy or sell an asset at a certain future time for a certain price. The contract is usually between two financial institutions or between a financial institution and one of its corporate clients. It is not normally traded on an exchange.One of the parties to a forward contract assumes a long position and agrees to buy the underlying asset on a specified future date for a certain specified price. The other party assumes a position and agrees to sell the asset on the same date for the same price. The specified price in a forward contract will be referred to as delivery price. The forward contract is settled at maturity. The holder of the short position delivers the asset to the holder of the long position in return for a cash amount equal to the delivery price. A forward contract is worth zero when it is first entered into. Later it can have position or negative value, depending on movements in the price of the asset.

2. Futures Contract:

A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price. Unlike forward contracts, futures contract are normally traded on an exchange. To make trading possible, the exchange specifies certain standardized features of the contract. As the two parties to the contract do not necessarily know each


other, the exchange also provides a mechanism, which gives the two parties a guarantee that the contract will be honoured.

One way in which futures contract is different from a forward contract is that an exact delivery date is not specified. The contract is referred to by its delivery month, and the exchange specifies the period during the month when delivery must be made.

3. Options:

An option is a contract, which gives the buyer the right, but not the obligation, to buy or sell specified quantity of the underlying assets, at a specific (strike) price on or before a specified time (expiration date). The underlying may be commodities like wheat/rice/ cotton/ gold/ oil/ or financial instruments like equity stocks/ stock index/ bonds etc.

There are basic two types of options. A call options gives the holder the right to buy the underlying asset by a certain date for a certain price. A put option gives the holder the right to sell the underlying asset by a certain date for a certain price.

4. Swaps:

Swaps are private agreements between two companies to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts.

5. Warrants:

Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.

6. LEAPS:

The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years.

7. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options.


Types of Traders in Derivatives Market:

1. HedgersHedgers are interested in reducing a risk that they already face. The purpose of hedging is to make the outcome more certain. It does not necessarily improve the outcome.

2. SpeculatorsWhereas hedgers want to eliminate an exposure to movements in the price of assets, speculators wish to take a position in the market. Either they are betting that a price will go up or they are betting that it will go down. Speculating using futures market provides an investor with a much higher level of leverage than speculating using spot market. Options also give extra leverage.

3. ArbitrageursThey are a third important group of participants in derivatives market. Arbitrage involves locking in a riskless profit by entering simultaneously into transactions in two or more markets. Arbitrage is sometimes possible when the futures price of an asset gets out of line with its cash price.


CHAPTER3

DEVELOPMENT OFDERIVATIVES MARKET IN INDIA

CH 3 DEVELOPMENT OF DERIVATIVES MARKET IN INDIA


The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws(Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24–member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary pre–conditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk containment in derivatives market in India. The report, which was submitted in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and real–time monitoring requirements.

The Securities Contract Regulation Act (SCRA) was amended in December 1999 to Include derivatives within the ambit of ‘securities’ and the regulatory framework was developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three–decade old notification, which prohibited forward trading in securities.

Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. To begin with, SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE–30(Sensex) index. This was followed by approval for trading in options based on these two indexes and options on individual securities.

The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on S&P CNX.

Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their


clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products.

Measures specified by SEBI to protect the rights of investor in the Derivative Market

1. Investor's money has to be kept separate at all levels and is permitted to be used only against the liability of the Investor and is not available to the trading member or clearing member or even any other investor.

2. The Trading Member is required to provide every investor with a risk disclosure document which will disclose the risks associated with the derivatives trading so that investors can take a conscious decision to trade in derivatives.

3. Investor would get the contract note duly time stamped for receipt of the order and execution of the order. The order will be executed with the identity of the client and without client ID order will not be accepted by the system. The investor could also demand the trade confirmation slip with his ID in support of the contract note. This will protect him from the risk of price favour, if any, extended by the Member.

4. In the derivative markets all money paid by the Investor towards margins on all open positions is kept in trust with the Clearing House/Clearing corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the default of the member. However, in the event of a default of a member, losses suffered by the Investor, if any, on settled / closed out position are compensated from the Investor Protection Fund, as per the rules, bye-laws and regulations of the derivative segment of the exchanges.


CHAPTER

4

RESEARCH

METHODOLOGY


CH 4 RESEARCH METHODOLOGY

Objectives

To determine the short term trend of nifty future using the important derivatives market indicators like Open interest and Put Call ratio.To determine the derivatives trading strategy on the basis of different market outlooks which will minimize the risk exposure and at the same times will maximize the profits.Scope of studyWe have done the study of nifty futures only.We have studied the short term trend of nifty futures for the month of Feb, 2010 only.We have used two important indicators Open Interest and Put-Call Ratio only to determine the trend of Nifty.Data collection sourcesPrimary –NoSecondary

Various stock market web sites Magazines Capitaline Neo software Odin diet Software

Beneficiaries of study Derivative traders Hedge funds Institutional investors Arbitragers Hedger Speculators Jobbers Investors Student Share broker Broking houses


Limitations

We have taken only Nifty futures for the purpose of study and not any other stock.

The period of study is only one month derivative contract which may not give the same result every time.

We have use only two indicators namely Open Interest and Put-Call ratio to determine the trend of Nifty.

Few of the strategies prescribed in the study may give unlimited loss if the market goes other way round.

There are many other factors which may lead the Nifty futures apart from the one which we have studied like technical analysis, Cost of Carry etc.


CHAPTER

5

STOCK MARKET

DERVATIVES

CH 5 Stock Market Derivatives


Futures & Options

In India, the National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the popular benchmark S&P CNX Nifty Index.

The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001. Futures and Options on individual securities are available on 180 securities stipulated by SEBI.

Instruments available in India

The National stock Exchange (NSE) has the following derivative products:


http://www.nseindia.com/content/fo/fo_underlyinglist.htm

http://www.nseindia.com/content/fo/fo_NIFTY.htm

ProductsIndex Futures Index

Options

Futures on Individual Securities

Options on Individual Securities

Underlying Instrument

S&P CNX NiftyS&P CNX Nifty

180 securities stipulated by SEBI

180 securities stipulated by SEBI

Type European American

Trading Cycle

Maximum of 3-month trading cycle. At any point in time, there will be 3 contracts available :

1) near month,

2) mid month &

3) far month

Same as index futures



Expiry DayLast Thursday of the expiry month




Contract Size

Permitted lot size is 200 & multiples thereof


As stipulated by NSE (not less than Rs.2 lacs)

As stipulated by NSE (not less than Rs.2 lacs)

BSE also offers similar products in the derivatives segment

Minimum contract size

The Standing Committee on Finance, a Parliamentary Committee, at the time of recommending amendment to Securities Contract (Regulation) Act, 1956 had recommended that the minimum contract size of derivative contracts traded in the Indian Markets should be pegged not below Rs. 2 Lakhs. Based on this recommendation SEBI has specified that the value of a derivative contract should not be less than Rs. 2 Lakh at the time of introducing the contract in the market.

Lot size of a contract

Lot size refers to number of underlying securities in one contract. Additionally, for stock specific derivative contracts SEBI has specified that the lot size of the underlying individual security should be in multiples of 100 and fractions, if any, should be rounded of to the next


higher multiple of 100. This requirement of SEBI coupled with the requirement of minimum contract size forms the basis of arriving at the lot size of a contract.

For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is Rs.2 lacs, then the lot size for that particular scripts stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.


CHAPTER6

INTRODUCTION TO

FUTURES


CH 6 INTRODUCTION TO FUTURES

Introduction of futures in India

The first derivative product introduced in the Indian securities market was “INDEX FUTURES" in June 2000. In India the “STOCK FUTURES” were first introduced on November 9, 2001 how Futures Markets Came About

Many people see pictures of the large crowd of traders standing in a crowd yelling and signaling with their hands, holding pieces of paper, and writing frantically. To the outsider, it looks like chaos. But do you really think that there is in fact chaos going on in the worlds futures pits? Not a chance. Actually, everyone in the crowd knows exactly what's going on. It is in fact, another language. Learn the language and you know what is going on.

How does this differ from the way things operated in the 'old days'? Before there were organized grain and commodity markets, farmers would bring their harvested crops to major population centers. There they would search for buyers. There were no storage facilities; and many times the harvest would rot before buyers were found. Also, because many farmers would bring their crops to market at the same time, the price of the crops or commodities would be driven down. There was tremendous supply in relation to demand. The reverse was true in the spring. Many times there would be a shortage of crops and commodities and the price would rise sharply. There was no organized or central marketplace where competitive bidding could take place.

Initially, the first organized and central marketplaces were created to provide spot prices for immediate delivery. Shortly thereafter, forward contracts were also established. These 'forwards' were forerunners to the present day futures contract.

Futures prices and the bid and asked price are continuously transmitted throughout the world electronically. Regardless of what geographic location the speculator or hedger is located in, he has the same access to price information as everyone else. Farmers, bankers, manufacturers, corporations, all have equal access. All they have to do is call their broker and arrange for the purchase or sale of a futures contract. The person who takes the opposite side of your trade may be a competitor who has a


different outlook on the future price, it may be a floor broker, or it could be a speculator.Types of Futures

Agricultural

The first type of agricultural contract is the grains. This group includes corn, oats, and wheat. The second type of agricultural contract is the oils and meal. This group includes soybeans, soya meal, soya oil, sunflower seed oil, and sunflower seed. The third group of agricultural commodities is livestock. This group includes live hogs, cattle, and pork bellies. The fourth type of agricultural commodities is the forest products group. This group includes lumber and plywood. The fifth group of agricultural commodities is textiles. This group includes cotton. The last type of agricultural commodity is foodstuffs. This group includes cocoa, coffee, orange juice, rice, and sugar.

For each of these commodities there are different contract months available. There are also different grades available. And there are different types of the commodity available. Contract months generally revolve around the harvest cycle. More actively traded commodities usually have more contract months available. Almost every month a new type of contract appears to meet the needs of a continuously growing corporate and institutional market.

Metallurgical

The group of metallurgical commodities includes the metals and the petroleum's. The metals group includes gold, silver, copper, palladium, and platinum. The petroleum group includes crude oil, gasoline, heating oil, and propane. Different contract months, grades, amounts, and types, of these contracts are available. Almost every month a new type of contract appears to meet the needs of a continuously growing corporate and institutional market.

Interest Bearing Assets

This group of futures began trading in 1975. Yet it is this group that has seen the most explosive growth. This group of futures contracts includes Treasury Bills, Treasury Bonds, Treasury Notes, Municipal Bonds, and Eurodollar Deposits. The entire yield curve is represented and it is possible to trade these instruments with tremendous flexibility as to maturity. It is also possible to trade contracts with the same maturity but different expected interest rate differentials. In addition, foreign exchanges also trade debt instruments. Almost every month a new type of contract appears to meet the needs of a continuously growing corporate and institutional market.

Indexes


Today, there are futures on most major indexes. The S&P 500, New York Stock Exchange Composite, New York Stock Exchange Utilities Index, Commodities Research Bureau (CRB), Russell 2000, S&P 400 Midcap, Value Line, and the FT-Se 100 Index (London). Stock index futures are settled in cash. There is no actual delivery of a good. The only possibility for the trader to settle his positions is to buy or sell an offsetting position or in cash at expiration. Almost every month a new type of contract appears to meet the needs of a continuously growing corporate and institutional market.

Foreign Currencies

In the 1970's when freely floating exchange rates were established it became possible to trade foreign currencies. Most major foreign currencies are traded. The principal currencies traded are the Canadian dollar, Japanese yen, British pound, Swiss franc, French franc, Eurodollar, Euromark, and the Deutsch mark. The forward market in currencies is much larger than the foreign exchange futures market. Additionally, there is now cross currency futures that trade. Examples of these are the Deutsch mark/French franc and the Deutsch mark/yen. Almost every month a new type of contract appears to meet the needs of a continuously growing corporate and institutional market.

Miscellaneous

Today, the number and variety of futures contracts that trade increase every month. Catastrophe insurance, cheddar cheese, cocoa, coffee, sugar, orange juice, diammonium phosphate (fertilizer), and anhydrous ammonia. Most of the contracts that trade which are not very liquid, and which one would never trade, are very useful to certain parties. Generally, these are corporations, which are using these contracts to hedge positions. They use them primarily to lock in a pre-determined price for their cost of goods and offset risk. Because many of these commodities are not liquid, they are poor selections for the speculator to bet on.

The Indian capital market has grown quite well in the last decade. In the boom period of 1992 and thereafter, even the common man living in a village was attracted to the stock market. The stock market was considered a profitable investment opportunity. Before July 2001, various stock exchanges including the BSE, NSE, and the Delhi Stock Exchange (DSE), provided carry forward facilities through the traditional badla system. By means of this system the purchase or sale of a security was not postponed till a particular future date; instead the system only provided for the carry


forward of a transaction from one settlement period (seven days) to the next settlement period for the payment of a fee known as badla charges.

In the badla system, due to limited settlement period and no future price discovery, speculators could manipulate prices, thus causing loss to small investors and ultimately eroding investor’s confidence in the capital market. The last eight years have emphasised the necessity of futures trading in the capital market. In the absence of an efficient futures market, there was no price discovery; therefore, prices could be moved in any desired direction. Recent developments in the capital market culminated in a ban on badla from July 2001.

In the absence of futures trading, certain operators- either on their own or in collusion with corporate management teams at times manipulated prices in the secondary market, causing irreparable damage to the growth of the market. The small and medium investors, who are the backbone of the market, whose savings come to the market via primary or secondary route shied away, having burnt their fingers. As the small investor avoided the capital market, the downturn in the secondary market ultimately affected the primary market because people stopped investing in shares for fear of loss or liquidity. Introducing futures contracts in major shares along with index futures helped to revive the capital markets. This did not only provide liquidity and efficiency to the market, but also helped in future price discovery

With renewed interest in old economy stocks, activity in the stock futures market seems to be widening too. While initial trading was restricted to information technology stocks like Satyam, Infosys or Digital, today punters are slowly building positions in counters such as SBI, Telco. Tisco, Larsen and Toubro (L&T) and BPCL. This has increased volumes and depth in the market but has also resulted in the outstanding position reaching almost Rs 1,000 crore.

FeaturesEvery futures contract is a forward contract. They:

Are entered into through exchange, traded on exchange and clearing corporation/house provides the settlement guarantee for trades.

Are of standard quantity; standard quality (in case of commodities). Have standard delivery time and place.

Frequently used terms in futures market


Contract Size – It specifies the amount of the asset that has to be delivered under one contract.

Multiplier - It is a pre-determined value, used to arrive at the contract size. It is the price per index point.

Tick Size - It is the minimum price difference between two quotes of similar nature.

Contract Month - The month in which the contract will expire. Open interest - Total outstanding long or short positions in the market at

any specific point in time. As total long positions for market would be equal to total short positions, for calculation of open Interest, only one side of the contracts is counted.

Volume - No. of contracts traded during a specific period of time. During a day, during a week or during a month.

Long position- Outstanding/unsettled purchase position at any point of time.

Short position - Outstanding/ unsettled sales position at any point of time. Open position - Outstanding/unsettled long or short position at any point

of time. Physical delivery - Open position at the expiry of the contract is settled

through delivery of the underlying. In futures market, delivery is low. Cash settlement - Open position at the expiry of the contract is settled in

cash. Index Futures fall in this category. In India we have only cash settlement system.

Concept of basis in futures market

Basis is defined as the difference between cash and futures prices:Basis = Cash prices - Future prices.

Basis can be either positive or negative (in Index futures, basis generally is negative).

Basis may change its sign several times during the life of the contract. Basis turns to zero at maturity of the futures contract i.e. both cash

and future prices converge at maturity.

Under normal market conditions Futures contracts are priced above the spot price. This is known as the Contango Market

It is possible for the Futures price to prevail below the spot price. Such a situation is known as backwardation. This may happen when the cost of carry is negative, or when the underlying asset is in short supply in the cash market but there is an expectation of increased supply in future – example agricultural products.

India may not be a big deal in international stock markets, but it has pulled it off in the derivatives segment. Individual stock futures have picked up well in India. In India the stock futures are the most popular among all the derivatives. They are similar with the old-age carry-forward system and are


very simple. In India, this is one of the reasons why stock futures are attracting more interest than options.

Sensex Futures

Sensex Futures are futures whose underlying asset is the stock market index. The index is an indicator of the broad market which reflects stock market movements. It is one of the oldest and reliable barometers of the Indian Stock Market; it provides time series data over a fairly long period of time. The Sensex enables one to effectively gauge stock market movements. The BSE 30 Sensex was first compiled in 1986 and is the market capitalization weighted index of 30 scripts which represents 30 large well-established and financially sound companies. The Sensex represents a broad spectrum of companies in a variety of industries. It represents 14 major industry groups which are large enough to be used for effective hedging. Given the lower cost structure and the overwhelming popularity of the Sensex, Sensex futures are expected to garner large volumes. The Sensex is the first index to be launched by any Stock Exchange in India and has the the largest social recall attached with it.

The Indian market is witnessing low volumes as it is in its nascent stages of growth. Retail participation will improve with better understanding and comfort with the product whereas the market is yet to witness institutional participation. FIIs have not been able to participate as they are still awaiting certain clarifications pertaining to margins from the Reserve Bank of India.

Why Sensex Futures?

Sensex futures are expected to evolve as the most liquid contract in the country. This is because Institutional investors in India and abroad, money managers and small investors use the Sensex when it comes to describing the mood of the Indian Stock markets. Thus is has been observed that the Sensex is an effective proxy for the Indian stock markets. Higher liquidity in the product essentially translates to lower impact cost of trading in Sensex futures. The arbitrage between the futures and the equity market is further expected to reduce impact cost. Trading in Stock index futures is likely to be pre-dominantly retail driven. Internationally, stock index futures are an institutional product with 60% of the volumes generated from hedging needs. Immense retail participation to the extent of 80 - 90% is expected in India based on the following factors:

Stock Index Futures require lower capital adequacy and margin requirements when compared to margins on carry forward of individual scripts.


Index futures have lower brokerage costs. Savings in cost is possible through reduced bid-ask spreads where

stocks are traded in packaged forms. The impact cost will be much lower in case of stock index futures as

opposed to dealing in individual scripts. The chances of manipulation are much lesser since the market is

conditioned to think in terms of the index and therefore would prefer to trade in stock index futures.

The Stock index futures are expected to be extremely liquid given the speculative nature of our markets and the overwhelming retail participation expected to be fairly high. In the near future, stock index futures will definitely see incredible volumes in India. It will be a blockbuster product and is pitched to become the most liquid contract in the world in terms of number of contracts traded if not in terms of notional value.

The advantage to the equity or cash market is in the fact that they would become less volatile as most of the speculative activity would shift to stock index futures. The stock index futures market should ideally have more depth, volumes and act as a stabilizing factor for the cash market. However, it is to early to base any conclusions on the volume or to form any firm trend.

Interpreting Futures Data

Derivatives market data is available on the Derivatives Trading and Settlement System (DTSS) under the head market summary. This terminal is provided to all members of the Derivatives Segment. Non-members can have access to the same information via the financial newspapers or from the Daily Official List of the Stock Exchange.

Theoretical way of Pricing Index Futures

The theoretical way of pricing any Future is to factor in the current price and holding costs or cost of carry.

In general, the Futures Price = Spot Price + Cost of Carry

Cost of carry is the sum of all costs incurred if a similar position is taken in cash market and carried to maturity of the futures contract less any revenue


which may result in this period. The costs typically include interest in case of financial futures (also insurance and storage costs in case of commodity futures). The revenue may be dividends in case of index futures.

Apart from the theoretical value, the actual value may vary depending on demand and supply of the underlying at present and expectations about the future. These factors play a much more important role in commodities, especially perishable commodities than in financial futures.

In general, the Futures price is greater than the spot price. In special cases, when cost of carry is negative, the Futures price may be lower than Spot prices.

S&P CNX Nifty Futures

A futures contract is a forward contract, which is traded on an Exchange. NSE commenced trading in index futures on June 12, 2000. The index futures contracts are based on the popular market benchmark S&P CNX Nifty index.

NSE defines the characteristics of the futures contract such as the underlying index, market lot, and the maturity date of the contract. The futures contracts are available for trading from introduction to the expiry date.

Contract Specifications Trading Parameters

Contract Specifications

Security descriptorThe security descriptor for the S&P CNX Nifty futures contracts is:Market type : NInstrument Type : FUTIDXUnderlying : NIFTYExpiry date : Date of contract expiryInstrument type represents the instrument i.e. Futures on Index.Underlying symbol denotes the underlying index which is S&P CNX NiftyExpiry date identifies the date of expiry of the contract


The underlying index is S&P CNX NIFTY.

Trading cycle

S&P CNX Nifty futures contracts have a maximum of 3-month trading cycle - the near month (one), the next month (two) and the far month (three). A new


contract is introduced on the trading day following the expiry of the near month contract. The new contract will be introduced for three month duration. This way, at any point in time, there will be 3 contracts available for trading in the market i.e., one near month, one mid month and one far month duration respectively.

Expiry day

S&P CNX Nifty futures contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.

Trading Parameters

Contract sizeThe permitted lot size of S&P CNX Nifty futures contracts is 200 and multiples thereof

Base PricesBase price of S&P CNX Nifty futures contracts on the first day of trading would be the previous day’s closing Nifty value. The base price of the contracts on subsequent trading days would be the daily settlement price of the futures contracts.

Price bands

There are no day minimum/maximum price ranges applicable for S&P CNX Nifty futures contracts. However, in order to prevent erroneous order entry by trading members, operating ranges are kept at + 10 %. In respect of orders which have come under price freeze, members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation the Exchange may approve such order.

Futures on Individual Securities

A futures contract is a forward contract, which is traded on an Exchange. NSE commenced trading in futures on individual securities on November 9, 2001. The futures contracts are available on 31 securities stipulated by the Securities & Exchange Board of India (SEBI). (Selection criteria for securities)

NSE defines the characteristics of the futures contract such as the underlying security, market lot, and the maturity date of the contract. The futures contracts are available for trading from introduction to the expiry date.



Trading Parameters


Security descriptor

The security descriptor for the futures contracts is:Market type : NInstrument Type : FUTSTKUnderlying : NIFTYExpiry date : Date of contract expiryInstrument type represents the instrument i.e. Futures on Index.Underlying symbol denotes the underlying security in the Capital Market (equities) segment of the ExchangeExpiry date identifies the date of expiry of the contract


Futures contracts are available on 31 securities stipulated by the Securities & Exchange Board of India (SEBI). These securities are traded in the Capital Market segment of the Exchange.

Trading cycleFutures contracts have a maximum of 3-month trading cycle - the near month (one), the next month (two) and the far month (three). New contracts are introduced on the trading day following the expiry of the near month contracts. The new contracts are introduced for three month duration. This way, at any point in time, there will be 3 contracts available for trading in the market (for each security) i.e., one near month, one mid month and one far month duration respectively.

Expiry dayFutures contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.

Trading Parameters

Contract sizeThe permitted lot size for the futures contracts on individual securities shall be the same as the same lot size of options contract for a given underlying security or such lot size as may be stipulated by the Exchange from time to time.

The value of the option contracts on individual securities may not be less than Rs. 2 lakhs at the time of introduction. The permitted lot size for the


options contracts on individual securities would be in multiples of 100 and fractions if any shall be rounded off to the next higher multiple of 100.

Base Prices

Base price of futures contracts on the first day of trading (i.e. on introduction) would be the previous day’s closing value of the underlying security. The base price of the contracts on subsequent trading days would be the daily settlement price of the futures contracts.

Price bands

There are no day minimum/maximum price ranges applicable for futures contracts. However, in order to prevent erroneous order entry by trading members, operating ranges are kept at + 20 %. In respect of orders which have come under price freeze, members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation the Exchange may approve such order.

DIFFERENCE BETWEEN FUTURES AND OPTIONS

Although exchange-traded futures and options may act as substitutes for each other, they have some crucial differences. In futures, the risk exposure and profit potential are unlimited for both the parties, while in options, risk exposure is unlimited and profit potential limited for the sellers, and it is the other way round for the buyers. The maturity of contracts is longer in futures than in options. In futures, there is no premium paid or received by any party, while in options the buyers have to pay a premium to the sellers. While Futures impose obligations on both the parties, options do so only on the sellers. Both the parties have to put in margins in futures trading, but only the sellers have to do so in options trading.


DIFFERENCE BETWEEN FORWARD AND FUTURES CONTRACTS

DIFFERENCE FORWARDS FUTURES1. Size of contracts

2. Price of contract

3. Mark to market

4. Margin

5. Counterparty risk

6. No. of contracts in A year

Decided by buyer and seller

Remains fixed till maturity

Not done

No margin required

Present

There can be any number of contracts

Standardized in each contract

Changes every day

Marked to market every day

Margins are to be paid by both buyers and sellers

Not present

No. of contracts in a year are fixed


7. Hedging

8. Liquidity

9. Nature of market

10. Mode of delivery

These are tailor-made for a specific date and quantity, so perfect hedging is possible

No liquidity

Over the counter

Specifically decided. Most of the contracts result in delivery.

between 4 and 12.

Hedging is by nearest month and quantity contracts so it is not perfect

Highly liquid

Exchange traded

Standardised. Most of the contracts are cash settled.

STOCK INDICES IN INDIAN STOCK MARKET

A stock price moves for two possible reasons news about the company or stock (such as strike in the factory, grant of a major contract or new product launch) or news about the economy (such as growth in the economy, are related budget announcement or a war or warlike situation). The job of an index is to capture the movement of the stock market with reference to news about the economy and the country. Each stock movement contains the mixture of two elements, stock news and index news. The most important stock market indices on which index futures contracts have been introduced are the S & P CNX nifty and the BSE sensex.

Margin Money

The aim of margin money is to minimize the risk of default by either counter-party. The payment of margin ensures that the risk is limited to the previous day’s price movement on each outstanding position. However, even this exposure is offset by the initial margin holdings. Margin money is like a security deposit or insurance against a possible Future loss of value.

Different Types of Margin


Yes, there can be different types of margin like Initial Margin, Variation margin, Maintenance margin and Additional margin.

Objective of Initial Margin

The basic aim of Initial margin is to cover the largest potential loss in one day. Both buyer and seller have to deposit margins. The initial margin is deposited before the opening of the day of the Futures transaction. Normally this margin is calculated on the basis of variance observed in daily price of the underlying (say the index) over a specified historical period (say immediately preceding 1 year). The margin is kept in a way that it covers price movements more than 99% of the time. Usually three sigma (standard deviation) is used for this measurement. This technique is also called value at risk (or VAR).Based on the volatility of market indices in India, the initial margin is expected to be around 8-10%.

Variation or Mark-to-Market Margin

All daily losses must be met by depositing of further collateral - known as variation margin, which is required by the close of business, the following day. Any profits on the contract are credited to the client’s variation margin account.

Maintenance Margin

Some exchanges work on the system of maintenance margin, which is set at a level slightly less than initial margin. The margin is required to be replenished to the level of initial margin, only if the margin level drops below the maintenance margin limit. For e.g.. If Initial Margin is fixed at 100 and Maintenance margin is at 80, then the broker is permitted to trade till such time that the balance in this initial margin account is 80 or more. If it drops below 80, say it drops to 70, and then a margin of 30 (and not 10) is to be paid to replenish the levels of initial margin. This concept is not expected to be used in India.

Additional Margin

In case of sudden higher than expected volatility, additional margin may be called for by the exchange. This is generally imposed when the exchange fears that the markets have become too volatile and may result in some


crisis, like payments crisis, etc. This is a preemptive move by exchange to prevent breakdown.

Cross Margining

This is a method of calculating margin after taking into account combined positions in Futures, options, cash market etc. Hence, the total margin requirement reduces due to cross-Hedges. This is unlikely to be introduced in India immediately.

Settlement MechanismFutures Contracts on Index or Individual Securities

Daily Mark-to-Market Settlement

The positions in the futures contracts for each member are marked-to-market to the daily settlement price of the futures contracts at the end of each trade day.

The profits/ losses are computed as the difference between the trade price or the previous day’s settlement price, as the case may be, and the current day’s settlement price. The CMs who have suffered a loss are required to pay the mark-to-market loss amount to NSCCL which is in turning passed on to the members who have made a profit. This is known as daily mark-to-market settlement.

Theoretical daily settlement price for unexpired futures contracts, which are not traded during the last half an hour on a day, is currently the price computed as per the formula detailed below:

F = S * e rt

Where: F = theoretical futures price


S = value of the underlying index

r = rate of interest (MIBOR)

t = time to expiration

Rate of interest may be the relevant MIBOR rate or such other rate as may be specified.

After daily settlement, all the open positions are reset to the daily settlement price.

CMs are responsible to collect and settle the daily mark to market profits / losses incurred by the TMs and their clients clearing and settling through them. The pay-in and pay-out of the mark-to-market settlement is on T+1 days (T = Trade day). The mark to market losses or profits are directly debited or credited to the CMs clearing bank account.

Final Settlement

On the expiry of the futures contracts, NSCCL marks all positions of a CM to the final settlement price and the resulting profit / loss is settled in cash.

The final settlement of the futures contracts is similar to the daily settlement process except for the method of computation of final settlement price. The final settlement profit / loss is computed as the difference between trade price or the previous day’s settlement price, as the case may be, and the final settlement price of the relevant futures contract.

Final settlement loss/ profit amount is debited/ credited to the relevant CMs clearing bank account on T+1 day (T= expiry day).

Open positions in futures contracts cease to exist after their expiration day

SETTLEMENT OF INDEX FUTURES CONTRACT

Stock index futures transactions are settled by cash delivery. No physical delivery of stock is given by the short. The long also does not make payment for the full value. In case of Nifty futures contract, the last trading day is the last Thursday of the contract’s expiring month. The amount is determined by referring to the cash price at the close of trading in the cash market on the last trading day in the futures contract. This procedure is generally followed in the case of all indices except the S & P 500 index. The S & P 500 uses a different settlement procedure. The final trading day for this contract is


always Thursday and all open contracts at that time are settled as per special opening quotations in the cash market on the following Friday morning.


CHAPTER7

INTRODUCTION TOOPTION


CH 7 INTRODUCTION TO OPTIONS

As its name signifies, an option is the right to buy or sell a particular asset for a limited time at a specified rate. These contracts give the buyer a right, but do not impose an obligation, to buy or sell the specified asset at a set price on or before a specified date. Today, options are traded not only in commodities, but in all financial assets such as treasury bills (T-bills), forex, stocks and stock indices.

We will discuss the basics of option contracts- how they work and how they are priced, stock index options and stock option in India.An active over the counter (OTC) option market existed in USA for more than a century under the auspices of the Put and Call Dealers Association. Options were first traded in an organized exchange in 1973 when Chicago Board Option Exchange (CBOE) came into existence. The CBOE standardized the call options on 18 common stocks.

In India, options were traditionally traded on the OTC market with names such as teji, mandi, teji-mandi, put, call etc. Commodity options were banned by the forward Contract Regulation Act, 1952, which is still in force. Similarly, options on securities were also banned in the Securities Contracts (Regulation) Act in 1969. However, with liberalization and with government’s realization of the virtues of options, options in securities were legally allowed in 1995. Now both NSE and BSE have started trading in option contracts in their respective indices and also in some selected scripts. This marked the beginning of options in an organized form in India. In the forex market, the RBI has allowed certain options to corporate with forex exposure and to all authorized dealers. Such options are generally traded in the dollar \ rupee rate. These are basically OTC options. With the ban on badla and rolling settlement in major scripts, the use of equity options has increased substantially. These innovative exchange traded instruments provide all possible opportunities for speculation, hedging and arbitrage. Now let us discuss basics of options:

Four Components to an Option

There are four components to an option. They are: The underlying security, the type of option (put or call), the strike price, and the expiration date. Let's take an XYZ November 100-call option as an example. XYZ is the underlying security. November is the expiration month. 100 is the strike price (sometimes referred to as the exercise price). And the option is a call (the holder has the right, not the obligation, to buy 100 shares of XYZ at a price of 100).

The Parties to an Option


There are two parties to an option. There is the party who buys the option; and there is the party who sells the option. The party who sells the option is the writer. The party who writes the option has the obligation to fulfill the terms of the contract need to it be exercised. This can be done by delivering to the appropriate broker 100 shares of the underlying security for each option written.

Types of Option Contracts

The options are of two styles. 1) European option and 2) American option

An American style option is the one, which can be exercised by the buyer on or before the expiration date, i.e. anytime between the day of purchase of the option and the day of its expiry. The European kind of option is the one that can be exercised by the buyer on the expiration day only and not anytime before that.

The options are of two types. 1) Call option and 2) Put option.

Call Option

A call option gives the holder/buyer, the right to buy specified quantity of the underlying asset at the strike price on or before expiration date. The seller however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy. One can buy call option when he or she expects the market to be bullish and sell call option when he or she expects the market to be bearish.

Example: An investor buys one European call option on Infosys at the strike price of Rs.3500 at a premium of Rs.100. If the market price of Infosys on the day of expiry is more than Rs.3500, the option will be exercised. The investor will earn profits once the share price crosses Rs.3600. Suppose stock price is Rs.3800, the option will be exercised and the investor will buy 1 share of Infosys from the seller of the option at Rs.3500 and sell it in the market at Rs.3800 making a profit of Rs.200.In another scenario, if at the time of expiry stock price falls below Rs.3500 say suppose it touches Rs.3000, the buyer of the call option will choose not to exercise his option. In this case the investor loses the premium, paid which shall be the profit earned by the seller of the call option.

Put Option


A put option gives the buyer the right to sell specified quantity of the underlying asset at the strike price on or before an expiry date. The seller of the put option however, has the obligation to buy the underlying asset at the strike price if the buyer decides to exercise his options to sell. One can buy put option when he or she expects the market to be bearish and sell put option when he or she expects the market to be bullish.

Example: An investor buys one European put option on Reliance at the strike price of Rs.300 at a premium of Rs.25. If the market price of Reliance on the day of expiry is less than Rs.300, the option will be exercised. The investor will earn profits once the share price goes below 275. Suppose stock price is Rs.260, the buyer of the put option immediately buys Reliance share in the market @ Rs.260 and exercises his option selling the Reliance share at Rs.300 to the option writer thus making a net profit of Rs.15.

In another scenario, if at the time of expiry stock price of Reliance is Rs.320, the buyer of the put option will choose not to exercise his option. In this case the investor loses the premium, paid which shall be the profit earned by the seller of the put option.

In-the-Money, At-the-Money, Out-the-Money

An option is said to be ‘at-the-money’, when the option’s strike price is equal to the underlying asset price. This is true for both puts and calls.

A call option is said to be in-the-money when the strike price of the option is less than the underlying asset price. On the other hand, a call option is out-of-the-money when the strike price is greater than the underlying asset price A put option is in-the-money when the strike price of the option is greater than the spot price of the underlying asset. A put option is out-the-money when the strike price is less than the spot price of underlying asset.

Options are said to be deep in-the-money (or deep out-the-money) if exercise price is at significant variance with the underlying asset price.

CALL OPTION PUT OPTIONIn-the-money Strike price < spot

priceStrike price > spot price

At-the-money Strike price = spot Strike price = spot


price priceOut-the-money Strike price > spot

priceStrike price < spot price

Stock index options The stock index options are options where the underlying asset is a

stock Index. For Example: Options on S&P 500 Index/ options on BSE Sensex etc.

Options on individual stocks Options contracts where the underlying asset is an equity stock, are

termed as options on stocks. They are mostly American style options cash settled or settled by

physical delivery.

Frequently used terms in options market

Underlying- The specific security/ asset on which an options contract is based.

Option premium – this is the price paid by the buyer to the seller to acquire the right to buy or sell.

Strike price or exercise price – the strike or exercise price of an option is the specified / pre-determined price of the underlying asset at which the same can be bought or sold if the option buyer exercises his right to buy/ sell on or before the expiration day.

Expiration date – is the date on which the option expires. On expiration date, either the option is exercised or it expires worthless.

Exercise date – is the date on which the option is actually exercised. Open interest – the total number of options contracts outstanding in

the market at any given point of time. Option holder – is the one who buys an option which can be a call or a

put option. Option seller/ writer – is the one who is obligated to buy or to sell. Option class – all listed options of a particular type(i.e., call or put) on a

particular underlying instrument, e.g., all Sensex Call options (or) all Sensex put options

Option series – an option series consists of all the options of a given class with the same expiration date and strike price. E.g.BSXCMAY3600 is an option series, which includes all Sensex call options that are traded with strike price of 3600 and expiry in May.

Option Greeks – the option Greeks are the tools that measure the sensitivity of the option price to the factors like price and volatility of the underlying, time to expiry etc.

Option Calculator – an option calculator is a tool to calculate the price of an option on the basis of various influencing factors like the price of


the underlying and its volatility, time to expiry, risk free interest rate etc.

Option valueAn option premium or the value of the option can be broken into two parts:

1. Intrinsic value and 2. Time value.

The intrinsic value of an option is defined as the amount by which an option is in-the-money or the immediate exercise value of the option when the underlying position is marked-to-market.

For a call option: Intrinsic Value = spot price – strike priceFor a put option: Intrinsic Value = strike price - spot price

The intrinsic value of an option must be a positive number or zero. It can not be negative.

Time value is the amount option buyers are willing to pay for the possibility that the option may become profitable prior to expiration due to favourable change in the price of the underlying. An option loses its time value as its expiration date nears. At expiration an option is worth only its intrinsic value. Time value cannot be negative.

Factors affecting the value of an option (premium)

There are two types of factors that affect the value of the option premium:

1) Quantifiable factors:

Underlying stock price


The strike price of the option The volatility of the underlying stock The time to expiration The risk free interest rate.

2) Non-Quantifiable Factors:

Market participants’ varying estimates of the underlying asset’s future volatility

Individuals’ varying estimates of future performance of the underlying asset, based on fundamental or technical analysis.

The effect of supply and demand- both in the options marketplace and in the market for the underlying asset.

The “depth” of the market for that option – the number of transactions and the contract’s trading volume on any given day.

Effect of various factors on option value

As discussed earlier we know that the option price is affected by different factors. In this section, the effect of various factors is shown in the following table:

Factor Option Impact on Option Component


Type Valueof Option Value

Share price moves up

Call OptionOption Value will also move up

Intrinsic Value

Share price moves down

Call OptionOption Value will move down

Intrinsic Value

Share price moves up

Put OptionOption Value will move down

Intrinsic Value

Share prices moves down

Put OptionOption Value will move up

Intrinsic Value

Time to expire is high

Call Option Option Value will be high Time Value

Time to expire is low

Call Option Option Value will be low Time Value

Tim e to expire is high

Put Option Option Value will be high Time Value

Time to expire is low

Put Option Option Value will be low Time Value

Volatility is high Call Option Option Value will be high Time Value

Volatility is low Call Option Option Value will be low Time Value

Volatility is high Put Option Option Value will be high Time Value

Volatility is low Put Option Option Value will be low Time Value

Margins

When call and put options are purchased, the option price must be paid in full. Investors are not allowed to buy options on margin. This is because options already contain substantial leverage. However the option seller needs to maintain funds in a margin account. This is because the broker and the exchange need to be satisfied that the investor will not default if the option is exercised. The size of the margin required depends on the circumstances.


Different pricing models for options

The theoretical option pricing models are used by option traders for calculating the fair value of an option on the basis of the earlier mentioned influencing factors. An option pricing model assists the trader in keeping the price of calls and puts in proper numerical relationship to each other and helping the trader make bids and offer quickly. The two most popular potion pricing models are

Black Scholes Model which assumes that percentage change in the price of underlying follows a normal distribution.

Binomial Model which assumes that percentage change in price of the underlying follows a binomial distribution.

Who decides on the premium paid on options & how is it calculated?

Options premium is not fixed by the Exchange. The fair value/ theoretical price of an option can be known with the help of pricing models and then depending on market conditions the price is determined by competitive bids and offers in the trading environment. An option’s premium/ price is the sum of intrinsic value and time value (explained above). If the price of the underlying stock is held constant, the intrinsic value portion of an option premium will remain constant as well. Therefore, any change in the price of the option will be entirely due to a change in the option’s time value. The time value component of the option premium can change in response to a change in the volatility of the underlying, the time to expiry, interest rate fluctuations, dividend payments and to the immediate effect of supply and demand for both the underlying and its option.

Advantages of options

Besides offering flexibility to the buyer in form of right to buy or sell, the major advantage of options is their versatility. They can be as conservative or as speculative as one’s investment strategy dictates.Some of the benefits of options are as under:

High leverage as by investing small amount of capital (in form of premium), one can take exposure in the underlying asset of much greater value.

Pre-known maximum risk for an option buyer. Large profit potential and limited risk for option buyer. One can protect his equity portfolio from a decline in the market by

way of buying a protective put wherein on buys puts against an


existing stock position. This option position can supply the insurance needed to overcome the uncertainty of the marketplace. Hence, by paying a relatively small premium (compared to the market value of the stock), an investor knows that no matter how far the stock drops, it can be sold at the strike price of the put anytime until the put expires.

Risk and gains involved in options The risk/loss of an option buyer is limited to the premium that he has

paid whereas his gains are unlimited. The risk of an option writer is unlimited where his gains are limited to

the premiums earned. When a physical delivery uncovered call is exercised upon, the writer

will have to purchase the underlying asset and his loss will be the excess of the purchase price over the exercise price of the call reduced by the premium received for writing the call.

The writer of a put option bears a risk of loss if the value of the underlying asset declines below the exercise price. The writer of a put bears the risk of a decline in the price of the underlying a sset potentially to zero.

S&P CNX Nifty Options

An option gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. The premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said to be long in the option. A person who sells (or writes) an option is said to be short in the option.

NSE introduced trading in index options on June 4, 2001. The options contracts are European style and cash settled and are based on the popular market benchmark S&P CNX Nifty index.



Contract SpecificationsSecurity descriptorThe security descriptor for the S&P CNX Nifty options contracts is:Market type : NInstrument Type : OPTIDXUnderlying : NIFTYExpiry date : Date of contract expiryOption Type : CE/ PEStrike Price: Strike price for the contract

Instrument type represents the instrument i.e. Options on Index.Underlying symbol denotes the underlying index, which is S&P CNX NiftyExpiry date identifies the date of expiry of the contractOption type identifies whether it is a call or a put option. CE - Call European, PE - Put European.


The underlying index is S&P CNX NIFTY.

Trading cycle

S&P CNX Nifty options contracts have a maximum of 3-month trading cycle - the near month (one), the next month (two) and the far month (three). On expiry of the near month contract, new contracts are introduced at new strike prices for both call and put options, on the trading day following the expiry of the near month contract. The new contracts are introduced for three month duration.

Expiry day

S&P CNX Nifty options contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.

Strike Price Intervals


The Exchange provides a minimum of five strike prices for every option type (i.e. call & put) during the trading month. At any time, there are two contracts in-the-money (ITM), two contracts out-of-the-money (OTM) and one contract at-the-money (ATM).

New contracts with new strike prices for existing expiration date are introduced for trading on the next working day based on the previous day's close Nifty values, as and when required. In order to decide upon the at-the-money strike price, the Nifty closing value is rounded off to the nearest 10.

The in-the-money strike price and the out-of-the-money strike price are based on the at-the-money strike price interval.

Trading Parameters

Contract size

The permitted lot size of S&P CNX Nifty options contracts is 50 and multiples thereof

Price bands

There are no day minimum/maximum price ranges applicable for options contracts. However, in order to prevent erroneous order entry, operating ranges and day minimum/maximum ranges for options contract are kept at 99% of the base price. In view of this, members will not be able to place orders at prices which are beyond 99% of the base price. Members desiring to place orders in option contracts beyond the day min-max range would be required to send a request to the Exchange. The base prices for option


contracts may be modified, at the discretion of the Exchange, based on the request received from trading members.

Options on Individual Securities

An option gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. The premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said to be long in the option. A person who sells (or writes) an option is said to be short in the option.

NSE became the first exchange to launch trading in options on individual securities. Trading in options on individual securities commenced from July 2, 2001. Option contracts are American style and cash settled and are available on 31 securities stipulated by the Securities & Exchange Board of India (SEBI). (Selection criteria for securities)



Security descriptorThe security descriptor for the options contracts is:

Market type : NInstrument Type : OPTSTKUnderlying : Symbol of underlying securityExpiry date : Date of contract expiryOption Type : CA / PAStrike Price: Strike price for the contractInstrument type represents the instrument i.e. Options on individual securities.Underlying symbol denotes the underlying security in the Capital Market (equities) segment of the ExchangeExpiry date identifies the date of expiry of the contractOption type identifies whether it is a call or a put option. CA - Call American, PA - Put American.



Option contracts are available on 31 securities stipulated by the Securities & Exchange Board of India (SEBI). These securities are traded in the Capital Market segment of the Exchange.

Trading cycleOptions contracts have a maximum of 3-month trading cycle - the near month (one), the next month (two) and the far month (three). On expiry of the near month contract, new contracts are introduced at new strike prices for both call and put options, on the trading day following the expiry of the near month contract. The new contracts are introduced for three month duration.

Expiry day

Options contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.

Strike Price Intervals

The Exchange provides a minimum of five strike prices for every option type (i.e. call & put) during the trading month. At any time, there are two contracts in-the-money (ITM), two contracts out-of-the-money (OTM) and one contract at-the-money (ATM).

The strike price interval would be:

Price of Underlying Strike Price interval (Rs.)

Less than or equal to Rs. 50 2.50

>Rs.50 to < Rs150 5

> Rs.150 to < Rs.250 10

> Rs.250 to < Rs.500 20

> Rs.500 to < Rs.1000 30


> Rs.1000 to < Rs.2500 50

>Rs.2500 100

New contracts with new strike prices for existing expiration date are introduced for trading on the next working day based on the previous day's underlying close values, as and when required. In order to decide upon the at-the-money strike price, the underlying closing value is rounded off to the nearest strike price interval.

The in-the-money strike price and the out-of-the-money strike price are based on the at-the-money strike price interval.

Trading Parameters

Contract sizeThe value of the option contracts on individual securities may not be less than Rs. 2 lakhs at the time of introduction. The permitted lot size for the options contracts on individual securities would be in multiples of 100 and fractions if any, shall be rounded off to the next higher multiple of 100.

Price bands

There are no day minimum/maximum price ranges applicable for options contracts. However, in order to prevent erroneous order entry, operating ranges and day minimum/maximum ranges for options contracts are kept at 99% of the base price. In view of this, members will not be able to place orders at prices which are beyond 99% of the base price. Members desiring to place orders in option contracts beyond the day min-max range would be required to send a request to the Exchange. The base prices for option


contracts may be modified, at the discretion of the Exchange, based on the request received from trading members.

How does option get settled?Option is a contract which has a market value like any other tradable commodity. Once an option is bought there are following alternatives that an option holder has:

One can sell an option of the same series as the one had bought and close out/square off his/ her position in that option at any time on or before the expiration.

One can exercise the option on the expiration day in case of European option or; on or before the expiration day in case of an American option. In case the option is ‘out of money’ at the time of expiry, it will expire worthless.

Settlement Mechanism:Options Contracts on Index or Individual Securities

Daily Premium Settlement

Premium settlement is cash settled and settlement style is premium style. The premium payable position and premium receivable positions are netted across all option contracts for each (Clearing Member) CM at the client level to determine the net premium payable or receivable amount, at the end of each day.

The CMs who have a premium payable position are required to pay the premium amount to NSCCL which is in turn passed on to the members who have a premium receivable position. This is known as daily premium settlement.

CMs are responsible to collect and settle for the premium amounts from the TMs and their clients clearing and settling through them.

The pay-in and pay-out of the premium settlement is on T+1 days

(T = Trade day). The premium payable amount and premium receivable amount are directly debited or credited to the CMs clearing bank account.


Interim Exercise Settlement for Options on Individual Securities

Interim exercise settlement for Option contracts on Individual Securities is effected for valid exercised option positions at in-the-money strike prices, at the close of the trading hours, on the day of exercise. Valid exercised option contracts are assigned to short positions in option contracts with the same series, on a random basis. The interim exercise settlement value is the difference between the strike price and the settlement price of the relevant option contract.

Exercise settlement value is debited/ credited to the relevant CMs clearing bank account on T+3 day (T= exercise date ).

Final Exercise Settlement

Final Exercise settlement is effected for option positions at in-the-money strike prices existing at the close of trading hours, on the expiration day of an option contract. Long positions at in-the money strike prices are automatically assigned to short positions in option contracts with the same series, on a random basis.

For index options contracts, exercise style is European style, while for options contracts on individual securities, exercise style is American style. Final Exercise is Automatic on expiry of the option contracts.

Option contracts, which have been exercised, shall be assigned and allocated to Clearing Members at the client level.

Exercise settlement is cash settled by debiting/ crediting of the clearing accounts of the relevant Clearing Members with the respective Clearing Bank.

Final settlement loss/ profit amount for option contracts on Index is debited/ credited to the relevant CMs clearing bank account on T+1 day (T = expiry day).


Final settlement loss/ profit amount for option contracts on Individual Securities is debited/ credited to the relevant CMs clearing bank account on T+3 day (T = expiry day).

Open positions, in option contracts, cease to exist after their expiration day. The pay-in / pay-out of funds for a CM on a day is the net amount across settlements and all TMs/ clients, in F&O Segment.

Options on Futures Contracts

Put and call options are being traded on an increasing number of futures contracts. Trading options on futures allows the speculator to participate in the futures market and know in advance what the maximum loss on his position will be. The purchase of a call entitles the option buyer the right, but not the obligation, to purchase a futures contract at a specified price at any time during the life of the option. The underlying futures contract and the price are specified. The purchase of a put option entitles the option buyer the right, not the obligation, to sell a specified futures contract at a specified price. Keep in mind that the profit realized with an option strategy is reduced by the option premium. The option's price is determined in the same fashion that an equity option is determined.

THE BLACK-SCHOLES MODEL

The Black-Scholes model is the most important option pricing model, which almost accurately values the option price. Option trading got a big boost after the model was developed in 1973. Originally, it was for non-dividend paying stocks, but was subsequently modified to be useful for value other asset options as well. This model uses the following equations for pricing European call options.

C = SN(d1) – X exp-rt N(d2)d1= ln(S/X exp-rt)/t + 0.5 td2= d1- t

here, c= option priceS = spot priceX= strike pricer= risk-free interest ratet= time to expiration= annualised volatility of stock returns (standard deviation of stock returns)ln is the natural logarithmN ( ) is the cumulative probability distribution function for a standardized normal variable


These equations are easy to use. The B-S model requires five variables, out of which four are easily available: current stock price, strike price, risk-free interest rate and the option’s time to expiration. The only variable that is not directly available is the expected volatility of the stock’s return, which is estimated using historical data.

There are other models apart from the Black-Scholes model. The

popular ones are the Binomial Model developed by Cox, Ross and Rubinstein and the Adison Whaley Model. These are slightly more sophisticated than the Black Scholes Model. However, the Option Values are not significantly different. For example, if one Model gives you a Value of Rs 14.12, another might come up with a Value of Rs 14.26. As a retail buyer of Options, you might find that the difference between the bid and the ask at any point of time is probably higher than the differences between Option Values of various Models.

VOLATILITY

Volatility of a stock price is a measure of how uncertain we are about future stock price movements. As volatility increases, the chance that the stock will do very well or very poorly increases. For the owner of the stock, these two outcomes tend to offset each other. However, this is not so for the owner of a call or put. The owner of the call option benfits from price increases but has limited downside risk in the event of price decreases since the most that he or she can lose is the price of the option. Similarly, the owner of a put benefits from price decreases but has limited downside risk in the event of price increases. The values of both calls and puts therefore increase as volatility increases.

There are two kinds of volatility. 1) Historical volatility 2) Implied volatility

Historical Volatility is a statistical measurement of past price movements. Implied volatility measures whether option premiums are relatively expensive or inexpensive. Implied volatility is calculated based on the currently traded option premiums.

1) Historical Volatility:


Historical volatility is a statistical measurement of past price movements. It is found by finding the standard deviation of the price relative on any underlying.

In mathematical form it is given by the following equation.

Wheren+1 : number of observations Si : stock price at end of ith interval (i =1,2,3,….,n) ui : ln(Si / Si-1)There is an important issue concerned with whether time should be measured in calendar days or trading days when volatility parameters are being estimated and used. The empirical research carried out to date indicates that the trading days should be used. In other words, days when the exchange is closed should be ignored for the purpose of the volatility calculation.Choosing an appropriate value for n is not easy. There is a difference of opinion among traders as to the number of days that should be considered. In the Indian context, we currently find that Options are available for 3 months. However, most of the trading happens in the first month. Thus, the relevant period for forecasting is one month or lower. Accordingly, it would be sensible to consider Volatility based on the past 10 trading days and for the past 20 trading days. Longer periods would perhaps not be relevant in the present context.

What the above formula gives is the Daily Volatility. If we want to know the Annual Volatility, we should multiply with the square root of the number of working days in a year. For example, suppose we found daily volatility 4.43% and if one year has 256 working days, square root of 256 days is 16 days. Thus in the above case the Annual Volatility is 4.43% x 16 = 70.88%.

In a similar manner, if we want to know the Volatility of the next 9 days, the 9-day Volatility will be 4.43% x 3 = 13.29%.

Note: in this project, we have taken n=10 for finding the historical volatility of any scrip.

2) Implied Volatility:Implied volatility is the volatility implied by an option price observed in the market. Implied volatility measures whether option premiums are relatively expensive or inexpensive. Implied volatility is calculated based on the currently traded option premiums. The implied volatility can be found from the Black-Scholes Formula given below.


c = S N(d1) – X e-r(T-t) N(d2)Where d1= ln (S/Xe-rt)/t + 0.5td2= d1- tand N(x) is the cumulative probability distribution function for a variable that is normally distributed with a mean of zero and a standard deviation of 1 (i.e., it is the probability that such a variable will be less than x).

By putting current market option premium c, strike price X, spot price S, interest rate r, time to expiration t, we can find the implied volatility . However this procedure is very lengthy and time consuming. Nowadays the option calculators are also available on different option related sites, from that we can find the implied volatility easily.

Usage of historical and implied volatility

The concept of Normal Distribution states that you can derive a deep understanding of possible movements in the share price from the figure of historical volatility. The movement will be within 1 standard deviation 66% of the time, within 2 standard deviations 95% of the time and within 3 standard deviations 99% of the time.

Example:Suppose the historical volatility today for Satyam scrip is 4.43%. If Satyam’s closing price today is Rs 287, expected movement in the next one day can be tabulated as under:

Number of Standard

Deviations

Percentage Price Movemen

t

Lower Price

Higher Price

Probability

One 4.43% 13 274 300 66%Two 8.86% 26 261 313 95%

Three 13.29% 38 325 249 99%

Similarly possible movement over the next nine days can be forecasted as under:

Number of Standard

Deviations

Percentage

Price Movement

Lower Price

Higher Price

Probability

One 13.29% 38 325 249 66%Two 26.58% 76 211 363 95%

Three 39.87% 114 173 401 99%


Predicting is a rather difficult science. First of all, we are not looking at direction at all. We are not saying whether Satyam will move up or down. Secondly, we are forecasting possible maximum swing in magnitude irrespective of direction. For example, we are saying that Satyam will close between Rs 249 to Rs 325 tomorrow and the probability of this happening is 99%. The implication is that the probability of Satyam closing below Rs 249 or above Rs 325 is 1%.

Thus historical volatility can be used to forecast the possible swing in magnitude of that particular scrip.Using historical volatility and implied volatility, one can also know whether the option is underpriced or overpriced.

Suppose historical volatility is less than the implied volatility of scrip then various possibilities can emerge. For example there is a situation where historical volatility of the scrip is 50%, but the implied volatility is 65%. This indicates some possibilities. One possibility is that the market is expecting the future volatility of the scrip to increase and is accordingly factoring in such expectations. Another possibility is that the market is mis-pricing the option and that the option value will come back low shortly. The third possibility could be that there is some news about the company that could affect the price favourably and this news is being reflected in the options become more expensive to begin with and in a short time, the underlying scrip will also reflect this phenomenon.

Depending on what one see from these possibilities (and there could be others too), one could take an appropriate stand.

For example, if one believes that volatility will rise, one can go in for option strategies that could suit such an event happening. If one believes that the option is being mispriced, as an aggressive player, one can sell such options with a belief that he/she can buy them back at a later date. Such a strategy would need to be supported by a hedging strategy, as mere selling of options will leave with unlimited risk. If one believes that there is some positive ‘news’, he might be tempted to buy the options inspite of high Volatility (or buy the underlying).

Suppose historical volatility is greater than the implied volatility of scrip then also various possibilities can emerge. It could indicate that the option itself is being underpriced in the market (which could make it a good buy on its own merit). It could indicate that the market believes that the days of high volatility in that scrip are over and it will now trade a lower level. Another possibility is that there is some bad news whereby the underlying stock price is expected to move down and the option has first started reflecting this possibility.


Once we have found the historical volatility, we can also predict the swing in which the option price will fall as discussed earlier. We have found the historical volatility of Digital scrip, which is 39.97% annually, and 2.49% daily. Therefore the volatility of Digital scrip for next nine days is 7.49%. From this we can say that maximum price movement during next nine days will be approx. Rs48 with 66% probability.

Volatility affects the option price significantly.

Volatility can be helpful in deciding which strategy to adoptVolatility is subject to the forces of supply and demand. Implied volatility will tend to rise during periods when demand from options buyers is strongest and will fall when demand is weakest. The key for all options trader is to buy volatility when it is perceived to be low and to sell volatility when it is perceived to be high

There are numerous strategies available for taking advantage of increases or decreases in volatility. If a rise in implied volatility is expected, one can adopt any one of the following strategies.

Long straddle Long strangle Short butterfly

If a fall in implied volatility expected, one can adopt any one of the following strategies.

Short straddle Short strangle Long butterfly

Example This example explains how to select view by taking into consideration all the topics that we discussed above like fair value of options, volatility, open interest, Greeks and put/call ratio.

Scrip: DigitalOn June 13, 2002 the historical volatility for Digital scrip was 39.97%. From this historical volatility we can find the fair value of option price using Black-Scholes pricing model whose formula is given below.

c = S N(d1) – X e-rt N(d2)Where c, S, X, N(x), d1, d2, and t are same as described above.


Here in this example,S= 651X= 630t= 14/365 =0.038r = 10% = 39.97%X e-rt = 630 e-0.10 *0.038 = 627.61d1= ln (S/Xe-rt)/t + 0.5t = 0.509d2= d1- t = 0.431

N(0.5080)= 0.6943N(0.4300)= 0.6664Therefore the fair value of option of 630 strike price is

C=33.05Thus the fair value of call option of Digital with strike price 630 on June 13,2002 should be Rs 33.05 but the option on that day was priced at Rs 50. This indicates that the Digital 630 call option is overpriced and knowing this one can sell Digital 630 call at premium 50 and then he/she can buy them back at later date.

Now, let’s look the above example in terms of volatility. As found from the historical data, the historical volatility of the Digital scrip on June 13, 2002 was 39.97% whereas the implied volatility of Digital 630 call option was 74.40%. Thus the historical volatility is less than the implied volatility. This indicates various possibilities as discussed earlier. But as there was no any special news about the company or about the IT industry, we can say that the option is overpriced and therefore one can follow the suggestion given in the above paragraph.

If we look the above problem in terms of open interest, we found the same result. This is indicated by the fact that from June 11 to June 13 the open interest for Digital futures has increased but this is due to bearishness so one can buy put option or sell call option.

The put/call ratio for June 13,2002 was 0.38. This indicates the uncertain view. But as we have already explained that the put/call ratio should be used in conjunction with other indicators, we can take bearish view.

Thus one can use different indicators to decide the view as explained in the above example.


CHAPTER8

INDICATORS OFINVESTING IN FUTURES & OPTION


CH 8 INDICATORS OF INVESTING IN FUTURES & OPTION:

1. OPEN INTEREST2. PUT/CALL RATIO3. VOLUME4. COST OF CARRY5. MARKET WIDE POSITION LIMIT6. ROLL OVER POSITION7. PUT CALL PARITY


CHAPTER9

OPEN INTEREST


CH 9 OPEN INTEREST

Open Interest is the number of open contracts of a given future or option contract. An open contract can be a long or short contract that has not been exercised, closed out, or allowed to expire. Open interest is really more of a data field than an indicator.

A fact that is sometimes overlooked is that a futures contract always involves a buyer and a seller. This means that one unit of open interest always represents two people, a buyer and a seller.

Open interest increases when a buyer and seller create a new contract. This happens when the buyer initiates a long position and the seller initiates a short position. Open interest decreases when the buyer and seller liquidate existing contracts. This happens when the buyer is selling an existing long position and the seller is covering an existing short position.

Open interest remains unchanged when only buyer close out his/her position or only seller close out his/her position.

Interpretation

Incidentally, in individual stocks, open interest can be a better indicator of demand than trading volumes in the underlying. Volumes are often used as an indication of bullishness. However, daily volumes reflect short-term daily trades that are closed out by settling rather than delivery. These day trades distort the picture of long-term demand.

In a stock that has a futures or derivatives market, it is possible to "correct" the volumes indicator by looking at the open interest position. Open interest reflects trading views that are not settled intra-session and hence can reflect sentiment in the stock more effectively.

By itself, open interest only shows the liquidity of a specific contract or market. However, combining volume analysis with open interest sometimes provides subtle clues to the flow of money in and out of the market:

Rising volume and rising open interest confirm the direction of the current trend.

Falling volume and falling open interest signal that an end to the current trend may be imminent.

The following are some interpretation that can be made using open interest. Rising open interest in an uptrend is bullish


Declining open interest in an uptrend is bearish. Rising open interest in a downtrend is bearish. Declining open interest in a downtrend is bullish. Within an uptrend, a sudden leveling off or decline in open interest often

warns a change in trend. Very high open interest at market tops is dangerous and can intensify

downside pressure.

There are a few interesting contrarian theories that revolve around the "Open Interest" in derivative contracts. The number of open contracts at the end of the day will vary according to demand for the underlying stock.

In case of futures trades, one must decide whether this is due to greater bullishness or bearishness since futures contracts aren't differentiated according to price -- they are simply bought and sold at a certain spread.

But options are differentiated according to price as well as position. Analysts can easily break down open interest into puts and calls. Then, the open interest put-call ratio can be analysed in a fashion similar to the traded put-call ratio.


How to interpret the open interest?Scrip: HDIL.

DATE SPOT PRICE

VOLUME OPEN INTEREST

PUT-CALL RATIO

June 3 641.00 683600 398800 0.75June 4 635.00 531600 414400 0.55June 5 647.80 747200 482800 0.54June 6 635.00 663600 444000 1.03June 7 624.00 668400 486800 0.75June 10 650.90 603200 467600 0.79June 11 661.00 831200 480800 0.66June 12 652.60 490400 486800 0.50June 13 651.00 1243200 498800 0.38June 14 644.00 525200 501600 0.44June 17 643.00 332000 503600 0.45June 18 644.30 468000 470800 0.26

The above table shows spot price, futures volume, futures open interest and put/call ratios on daily bases. As we have mentioned earlier that one must keep in mind that one must decide that increase in open interest is due to bullishness or bearishness in case of futures contracts. As we can see from the table that from June 3,09 to June 5,09 the open interest for futures contracts has increased considerably and this increase is due to bullishness so one can buy call option or sell put option. From the table we find that the spot price of the scrip has increased during the next three to four days. To decide when to close out the position one can use volumes as indicator. For example, on June 11,2009 the volume was increasing in large amount, this indicates that the next day the price of the scrip will fall and so the options price. So one can close out his/her position on June 11, 2009.

Similarly from June 11 to June 13 the open interest for futures has increased but this is due to bearishness so one can buy put option or sell call option.


CHAPTER10

PUT/CALL RATIO


CH 10 PUT/CALL RATIO

The Put/Call Ratio ("P/C Ratio") is a market sentiment indicator that shows the relationship between the numbers of Puts to Calls traded.

Traditionally, options are traded by unsophisticated, impatient investors who are lured by the potential for huge profits with a small capital outlay. Interestingly, the actions of these investors provide excellent signals for market tops and bottoms.

Interpretation

A Call gives an investor the right to purchase lot size of stock at a pre-determined price. Investors who purchase Calls expect stock prices to rise in the coming months. Conversely, a Put gives an investor the right to sell lot size of stock at a pre-set price. Investors purchasing Puts expect stock prices to decline. (An exception to these general rules is that Puts and Calls can also be purchased to hedge other investments, even other options.) Because investors who purchase Calls expect the market to rise and investors who purchase Puts expect the market to decline, the relationship between the numbers of Puts to Calls illustrates the bearish/bullish expectations of these traditionally ineffective investors.

The higher the level of the P/C Ratio, the more bearish these investors are on the market. Conversely, lower readings indicate high Call volume and thus bullish expectations.

The P/C Ratio is a contrarian indicator. When it reaches "excessive" levels, the market usually corrects by moving the opposite direction. The following table, general guidelines for interpreting the P/C Ratio. However, the market does not have to correct itself just because investors are excessive in their bullish/bearish beliefs!

P/C ratioIndication

Less than 0.35 Extremely bullishGreater than 0.75 Excessively bearish

Greater than 0.35 andless than 0.75

Uncertain


CalculationThe Puts/Calls Ratio is calculated by dividing the volume of Puts by the volume of Calls.

P/C Ratio=Volume Traded For Put Options/Volume Traded For Call Options

Note: As with all technical analysis tools, we should use the P/C Ratio in conjunction with other market indicators.There are some constraints with regard to P/C ratio. For example on June 6, 2009 the P/C ratio for HDIL scrip was 1.03. According to above table this indicates extremely bearishness but in actual as the war clouds disappeared, Digital was up on June 7,2009. Therefore as mentioned above we must use P/C ratio in conjunction with the other market indicators.

DYNAMICS IN PUT CALL RATIO:

But as per recent observation it is quiet evident that the above mentioned ratios doesn’t work as per its interpretation. So we have found out the recent observation as per Open Interest as well as Volume basis as below.

P/C ratioIndication

Less than 0.65 Extremely bullishGreater than 1.35 Extremely bearish

Greater than 0.65 andless than 1.35

Uncertain


CHAPTER11

ANALYSIS


CH 11 [a] STUDY OF SHORT TERM TREND OF NIFTY DERIVATIVES USING:

Put/Call Ratio Open Interest

Put/ Call Ratio:

There are two ways in which we can determine Put/Call Ratio:

o On the basis of Volume o On the basis of Open Interest

PUT/CALL RATIO ON THE BASIS OF VOLUME OF NIFTY FUTURES FOR THE MONTH OF FEB-2010.

DATE TRADING DAY

PRE. DAY PUT/CALL

RATIO

CLOSING PUT CALL

RATIO

PRE. DAY NIFTY

CLOSINGCLOSING

DAY NIFTYVIEW RESULT

29/1/2010 1 1.08 1.01 4867 4882 BULLISH SUCCESS1/2/2010 2 1.01 1.11 4882 4899 BEARISH FAILURE2/2/2010 3 1.11 1.18 4899 4830 BEARISH SUCCESS3/2/2010 4 1.18 1.07 4830 4925.8 BULLISH SUCCESS4/2/2010 5 1.07 0.99 4925.8 4845.35 BULLISH FAILURE5/2/2010 6 0.99 1.05 4845.35 4718.65 BEARISH SUCCESS6/2/2010 7 1.05 1.11 4718.65 4757.25 BEARISH FAILURE8/2/2010 8 1.11 1.05 4757.25 4760.4 BULLISH SUCCESS9/2/2010 9 1.05 1.03 4760.4 4792.65 BULLISH SUCCESS10/2/2010 10 1.03 0.84 4792.65 4757.2 BULLISH FAILURE11/2/2010 11 0.84 0.93 4757.2 4826.85 BEARISH FAILURE15/2/2010 12 0.93 1.01 4826.85 4801.95 BEARISH SUCCESS16/2/2010 13 1.01 0.94 4801.95 4855.75 BULLISH SUCCESS17/2/2010 14 0.94 0.84 4855.75 4914 BULLISH SUCCESS18/2/2010 15 0.84 1.12 4914 4886.8 BEARISH SUCCESS19/2/2010 16 1.12 1.06 4886.8 4845.95 BULLISH FAILURE


22/2/2010 17 1.06 0.91 4845.95 4856.6 BULLISH SUCCESS

SUCCESS / FAILURE RATIO:

From the above mentioned 17 trading days, in 11 trading days it follows the Put/Call Ratios (Volume) Criterion, so the success ratio is 65%, while in 6 trading it has turned around the other way.

PUT/CALL RATIO ON THE BASIS OF OPEN INTEREST OF NIFTY FUTURES FOR THE MONTH OF FEB-2010.


DATE TRADING DAY

PRE. DAY PUT/CALL

RATIOCLOSING PUT CALL RATIO

PRE. DAY NIFTY CLOSING

CLOSING DAY NIFTY

VIEW RESULT

29/1/2010 1 1.1 1.04 4867 4882 BULLISH SUCCESS1/2/2010 2 1.04 1.09 4882 4899 BEARISH FAILURE2/2/2010 3 1.09 1.2 4899 4830 BEARISH SUCCESS3/2/2010 4 1.2 1.08 4830 4925.8 BULLISH SUCCESS4/2/2010 5 1.08 1.17 4925.8 4845.35 BEARISH SUCCESS5/2/2010 6 1.17 1.08 4845.35 4718.65 BULLISH FAILURE6/2/2010 7 1.08 0.98 4718.65 4757.25 BULLISH SUCCESS8/2/2010 8 0.98 0.97 4757.25 4760.4 BULLISH SUCCESS9/2/2010 9 0.97 0.94 4760.4 4792.65 BEARISH SUCCESS10/2/2010 10 0.94 1 4792.65 4757.2 BULLISH SUCCESS11/2/2010 11 1 0.91 4757.2 4826.85 BEARISH SUCCESS15/2/2010 12 0.91 1.02 4826.85 4801.95 BEARISH SUCCESS16/2/2010 13 1.02 0.96 4801.95 4855.75 BULLISH SUCCESS17/2/2010 14 0.96 1.08 4855.75 4914 BEARISH FAILURE18/2/2010 15 1.08 1.12 4914 4886.8 BEARISH SUCCESS19/2/2010 16 1.12 1.06 4886.8 4845.95 BULLISH FAILURE22/2/2010 17 1.06 0.97 4845.95 4856.6 BULLISH SUCCESS


SUCCESS / FAILURE RATIO:

From the above mentioned 17 trading days, in 13 trading days it follows the Put/Call Ratios (Open Interest) Criterion, so the success ratio is 76.47% while in 4 trading days it has turned around the other way.


PUT/CALL RATIO ON THE BASIS OF COMBINATION OF OPEN INTEREST & VOLUME OF NIFTY FUTURES FOR THE MONTH OF FEB-2010.

DAY OI VIEWVOL. VIEW

COMMON VIEW RESULT

1 BULLISH BULLISH YES SUCCESS2 BEARISH BEARISH YES FAILURE3 BEARISH BEARISH YES SUCCESS4 BULLISH BULLISH YES SUCCESS5 BEARISH BULLISH NO NA6 BULLISH BEARISH NO NA7 BULLISH BEARISH NO NA8 BULLISH BULLISH YES SUCCESS9 BULLISH BULLISH YES SUCCESS10 BEARISH BULLISH NO NA11 BULLISH BEARISH NO NA12 BEARISH BEARISH YES SUCCESS13 BULLISH BULLISH YES SUCCESS14 BEARISH BULLISH NO NA15 BEARISH BEARISH YES SUCCESS16 BULLISH BULLISH YES FAILURE

SUCCESS /FAILURE RATIOS:

From the above mentioned 16 trading days, in 10 trading days, it has given the same view regarding the market, from this, in 8


trading days it is successful. Thus the success ratio is 80%.while in 6 trading days, it contradicts. Thus the combination of Volume & Open Interest gives high accuracy than the individual.

OPEN INTEREST:

The following are some interpretation that can be made using open interest. Rising open interest in an uptrend is bullish Declining open interest in an uptrend is bearish. Rising open interest in a downtrend is bearish. Declining open interest in a downtrend is bullish.


Within an uptrend, a sudden leveling off or decline in open interest often warns a change in trend.

Very high open interest at market tops is dangerous and can intensify downside pressure.

There are a few interesting contrarian theories that revolve around the "Open Interest" in derivative contracts. The number of open contracts at the end of the day will vary according to demand for the underlying stock.

In case of futures trades, one must decide whether this is due to greater bullishness or bearishness since futures contracts aren't differentiated according to price -- they are simply bought and sold at a certain spread.

DATETRADING

DAYPREV

DAY O.ICLOSING DAY O.I

PREV.CLOSING NIFTY

CLOSING NIFTY

NEXT DAY

NIFTY CLOSING VIEW RESULT

29/1/2010 1 22932750 27986150 4843.7 4872.05 4882 BULLISH SUCCESS1/2/2010 2 27986150 29923300 4872.05 4882 4899 BULLISH SUCCESS2/2/2010 3 29923300 29896500 4882 4899 4830 BEARISH SUCCESS3/2/2010 4 29896500 32216250 4899 4830 4925.8 BEARISH FAILURE4/2/2010 5 32216250 29924950 4830 4925.8 4845.35 BEARISH SUCCESS5/2/2010 6 29924950 30668050 4925.8 4845.35 4718.65 BEARISH SUCCESS6/2/2010 7 30668050 31376300 4845.35 4718.65 4757.25 BEARISH NEAUTRAL


8/2/2010 8 31376300 31349800 4718.65 4757.25 4760.4 BEARISH NEAUTRAL9/2/2010 9 31349800 31265550 4757.25 4760.4 4792.65 BEARISH NEAUTRAL10/2/2010 10 31265550 29230200 4760.4 4792.65 4757.2 BEARISH SUCCESS11/2/2010 11 29230200 29873700 4792.65 4757.2 4826.85 BEARISH FAILURE15/2/2010 12 29873700 28537150 4757.2 4826.85 4801.95 BEARISH SUCCESS16/2/2010 13 28537150 28928050 4826.85 4801.95 4855.75 BEARISH FAILURE17/2/2010 14 28928050 28665850 4801.95 4855.75 4914 BEARISH FAILURE18/2/2010 15 28665850 30541650 4855.75 4914 4886.8 BULLISH FAILURE19/2/2010 16 30541650 26499600 4914 4886.8 4845.95 BULLISH FAILURE22/2/2010 17 26499600 24762400 4886.8 4845.95 4856.6 BULLISH SUCCESS23/2/2010 18 24762400 22727400 4845.95 4856.6 4870.55 BEARISH FAILURE24/2/2010 19 22727400 20702050 4856.6 4870.55 4862 BEARISH SUCCESS25/2/2010 20 20702050 14860050 4870.55 4862 4863.2 BULLISH SUCCESS

TABLE SHOWING THE RELATIONSHIP BETWEEN THE CHANGE IN OPEN INTEREST AND PRICE OF THE NIFTY FUTURES FOR THE MONTH OF FEB 2010 AND ITS EFFECT ON THE NEXT DAY PRICES.

SUCCESS /FAILURE RATIOS:

From the above mentioned 20 trading days, in 10 trading days it follows the Open Interest Criterion, so the pure success ratio is 50.00% while in 7 trading days it has turned around the other way.And in 3 trading days, it has given the neutral result.


CH 11(B) THE RISK MINIMISATION TRADING STRATEGIES USING FUTURES AND OPTIONS ON THE BASIS OF:

Bullish Outlook Bearish Outlook

Volatile Outlook

Range bound Outlook

Opportunistic Outlook

BY USING:

oOPTIONSoCOMBINATIONS OF FUTURES & OPTIONS


TRADING STRATEGIES USED FOR BULLISH OUTLOOK

(1) Long Call Ladder(2) Bull Spread(3) Covered Call Writing(4) Protective Put Buying(5) Collar Strategy(6) Short Combo(7) Long Strap

TRADING STRATEGIES USED FOR BEARISH OUTLOOK

(1) Long Put Ladder(2) Bear Spread(3) Covered Put Writing (4) Protective Call Buying (5) Reverse Collar Strategy(6) Long Combo(7) Long Strip


TRADING STRATEGIES USED FOR RANGEBOUND OUTLOOK

(1) Long Condor(2) Double Top(3) Christmas Tree(4) Short Guts(5) Ratio Spread(6) Butterfly

TRADING STRATEGIES USED FOR VOLATILE OUTLOOK

(1) Long Guts(2) Short Condor(3) Butterfly Spread(4) Long straddle(5) Long strangle

TRADING STRATEGIES USED FOR OPPORTUNISTIC OUTLOOK

(1) Conversion(2) Reversal(3) Long Box


TRADING STRATEGIES USED FOR BULLISH OUTLOOK

(1) Long Condor Ladder

DESCRIPTION: - Buy a Call at a low Strike price K1, sell a call at a high Strike price K2 & sell a call at a higher Strike price K3

PAYOFF: At St < K1, fixed profit of Net Premium Received At K2 > St > K1, Profit increases linearly with the St At K3 > St > K2 , Fixed Profit ; i.e Net Premium

Received + Diference between K2 & K3 At St > K3, Profit falls linearly with St

When to Use: - When u have a Bullish Outlook but not very Bullish

Market expectation: Direction bearish/volatility bearish. In this case the holder expects the market to settle between B and C but feels that volatility will not rise.

Profit & loss characteristics at expiry:Profit: Limited to the difference between strikes A and B plus (minus) net credit (debit).

Loss: Unlimited if underlying rallies. At A or below, loss limited to net cost.

Break-even: Lower break-even reached when the underlying exceeds the lower strike option A, by the same amount as the net cost of the position. Higher break-even point reached when the intrinsic value of option A, plus (minus) the net credit (debit) from establishing the position, is equal to the intrinsic value of the two higher strike options at B and C.

Current Price of the Stock =So=

648

Strike Price of Call Option=K1= 640Premium of Call Option =K1= Rs. 20.2Strike Price of Call Option=K2= 660Premium of Call Option =K2= Rs. 14.45


Strike Price of Call Option=K3= 680Premium of Call Optionk3 6.95

PAY-OFF TABLE:

StPremiu

m for K1

Gain / Loss on

K1Premiu

m for K2Gain /

Loss on K2Premiu

m for K3

Gain / Loss on

K3Total

Gain/Loss

635 20.2 -20.2 14.45 14.45 6.95 6.95 1.2636 20.2 -20.2 14.45 14.45 6.95 6.95 1.2637 20.2 -20.2 14.45 14.45 6.95 6.95 1.2638 20.2 -20.2 14.45 14.45 6.95 6.95 1.2639 20.2 -20.2 14.45 14.45 6.95 6.95 1.2640 20.2 -20.2 14.45 14.45 6.95 6.95 1.2641 20.2 -19.2 14.45 14.45 6.95 6.95 2.2642 20.2 -18.2 14.45 14.45 6.95 6.95 3.2643 20.2 -17.2 14.45 14.45 6.95 6.95 4.2644 20.2 -16.2 14.45 14.45 6.95 6.95 5.2645 20.2 -15.2 14.45 14.45 6.95 6.95 6.2646 20.2 -14.2 14.45 14.45 6.95 6.95 7.2647 20.2 -13.2 14.45 14.45 6.95 6.95 8.2648 20.2 -12.2 14.45 14.45 6.95 6.95 9.2649 20.2 -11.2 14.45 14.45 6.95 6.95 10.2650 20.2 -10.2 14.45 14.45 6.95 6.95 11.2651 20.2 -9.2 14.45 14.45 6.95 6.95 12.2652 20.2 -8.2 14.45 14.45 6.95 6.95 13.2653 20.2 -7.2 14.45 14.45 6.95 6.95 14.2654 20.2 -6.2 14.45 14.45 6.95 6.95 15.2655 20.2 -5.2 14.45 14.45 6.95 6.95 16.2656 20.2 -4.2 14.45 14.45 6.95 6.95 17.2657 20.2 -3.2 14.45 14.45 6.95 6.95 18.2658 20.2 -2.2 14.45 14.45 6.95 6.95 19.2659 20.2 -1.2 14.45 14.45 6.95 6.95 20.2660 20.2 -0.2 14.45 14.45 6.95 6.95 21.2661 20.2 0.8 14.45 13.45 6.95 6.95 21.2662 20.2 1.8 14.45 12.45 6.95 6.95 21.2663 20.2 2.8 14.45 11.45 6.95 6.95 21.2664 20.2 3.8 14.45 10.45 6.95 6.95 21.2665 20.2 4.8 14.45 9.45 6.95 6.95 21.2666 20.2 5.8 14.45 8.45 6.95 6.95 21.2667 20.2 6.8 14.45 7.45 6.95 6.95 21.2668 20.2 7.8 14.45 6.45 6.95 6.95 21.2669 20.2 8.8 14.45 5.45 6.95 6.95 21.2670 20.2 9.8 14.45 4.45 6.95 6.95 21.2671 20.2 10.8 14.45 3.45 6.95 6.95 21.2672 20.2 11.8 14.45 2.45 6.95 6.95 21.2673 20.2 12.8 14.45 1.45 6.95 6.95 21.2674 20.2 13.8 14.45 0.45 6.95 6.95 21.2


675 20.2 14.8 14.45 -0.55 6.95 6.95 21.2676 20.2 15.8 14.45 -1.55 6.95 6.95 21.2677 20.2 16.8 14.45 -2.55 6.95 6.95 21.2678 20.2 17.8 14.45 -3.55 6.95 6.95 21.2679 20.2 18.8 14.45 -4.55 6.95 6.95 21.2680 20.2 19.8 14.45 -5.55 6.95 6.95 21.2681 20.2 20.8 14.45 -6.55 6.95 5.95 20.2682 20.2 21.8 14.45 -7.55 6.95 4.95 19.2


(2) Bull Spread

DESCRIPTION: - Long on 1 Call at low Strike price K1 & Short on 1 Call at higher strike price K2

PAYOFF: At St ≤ K1, Loss is Fixed; i.e Net Premium Paid At K2 ≥ St ≥K1, Loss Reduces linearly with increase in Price At St > K2, Profit is Fixed; i.e K2 - K1 - Net Premium paid

Market Expectation: Market bullish/volatility neutral. The spread has the advantage of being cheaper to establish than the purchase of a single call, as the premium received from the sold call reduces the overall cost. The spread offers a limited profit potential if the underlying rises and a limited loss if the underlying falls.

When to Use: - Mildly Bullish Perspective

Profit and loss characteristics at expiry:Profit: Limited to the difference between the two strikes minus net premium cost. Maximum profit occurs where the underlying rises to the level of the higher strike B or above.Loss: Limited to any initial premium paid in establishing the position. Maximum loss occurs where the underlying falls to the level of the lower strike A or below.

Break-even: Reached when the underlying is above strike A by the same amount as the net cost of establishing the position.

Current Price of the Stock =So= 648Strike Price of Call Option=K1= 660Premium of Call Option =K1= Rs. 14.45Strike Price of Call Option=K2= 680Premium of Call Option =K2= Rs. 6.95


PAY-OFF TABLE:

St

Premium for Kc1

Gain / Loss on

Kc1

Premium for Kc2

Gain / Loss on

Kc2Total

Gain/Loss

650 14.45 -14.45 6.95 6.95 -7.5651 14.45 -14.45 6.95 6.95 -7.5652 14.45 -14.45 6.95 6.95 -7.5653 14.45 -14.45 6.95 6.95 -7.5654 14.45 -14.45 6.95 6.95 -7.5655 14.45 -14.45 6.95 6.95 -7.5656 14.45 -14.45 6.95 6.95 -7.5657 14.45 -14.45 6.95 6.95 -7.5658 14.45 -14.45 6.95 6.95 -7.5659 14.45 -14.45 6.95 6.95 -7.5660 14.45 -14.45 6.95 6.95 -7.5661 14.45 -13.45 6.95 6.95 -6.5662 14.45 -12.45 6.95 6.95 -5.5663 14.45 -11.45 6.95 6.95 -4.5664 14.45 -10.45 6.95 6.95 -3.5665 14.45 -9.45 6.95 6.95 -2.5666 14.45 -8.45 6.95 6.95 -1.5667 14.45 -7.45 6.95 6.95 -0.5668 14.45 -6.45 6.95 6.95 0.5669 14.45 -5.45 6.95 6.95 1.5670 14.45 -4.45 6.95 6.95 2.5671 14.45 -3.45 6.95 6.95 3.5672 14.45 -2.45 6.95 6.95 4.5673 14.45 -1.45 6.95 6.95 5.5674 14.45 -0.45 6.95 6.95 6.5675 14.45 0.55 6.95 6.95 7.5676 14.45 1.55 6.95 6.95 8.5677 14.45 2.55 6.95 6.95 9.5678 14.45 3.55 6.95 6.95 10.5679 14.45 4.55 6.95 6.95 11.5680 14.45 5.55 6.95 6.95 12.5681 14.45 6.55 6.95 5.95 12.5682 14.45 7.55 6.95 4.95 12.5683 14.45 8.55 6.95 3.95 12.5684 14.45 9.55 6.95 2.95 12.5685 14.45 10.55 6.95 1.95 12.5686 14.45 11.55 6.95 0.95 12.5687 14.45 12.55 6.95 -0.05 12.5


(3) Covered Call Writing

DESCRIPTION: - Long on Underlying & Short on Call Option at a very high Strike Price

PAYOFF:- At St = (So - Premium Received), Profit = zero When St < (So - Premium Received), Loss on Underlying is reduced by

the Amount of Premium When K > St > (So - Premium Received), Gain on Underlying is

increased by the Amount of Premium When St > K, profit is fixed, i.e St - So + Premium Received

When to Use :- When the trader feels that the Stock Price will Increase but not upto the level of Strike Price

Current price of the stock S0 = 648Strike Price = K 680Premium of Call Option C=6.95


PAY-OFF TABLE

Price of Stock on Expiry Day

Gain / Loss on Stock (St - So)

Premium Received ( C )

Profit / Loss on Option Position

Total Profit / Loss

635 -13 6.95 6.95 -6.05638 -10 6.95 6.95 -3.05641 -7 6.95 6.95 -0.05645 -3 6.95 6.95 3.95648 0 6.95 6.95 6.95652 4 6.95 6.95 10.95655 7 6.95 6.95 13.95658 10 6.95 6.95 16.95662 14 6.95 6.95 20.95665 17 6.95 6.95 23.95668 20 6.95 6.95 26.95672 24 6.95 6.95 30.95675 27 6.95 6.95 33.95677 29 6.95 6.95 35.95680 32 6.95 6.95 38.95683 35 6.95 3.95 38.95687 39 6.95 -0.05 38.95690 42 6.95 -3.05 38.95692 44 6.95 -5.05 38.95


(4) Protective Put Buying

DESCRIPTION: - Long on the Underlying & Long on the Put Option

PAYOFF:- At St = K or St < K , Maximum Loss is fixed; i.e Put Premium + ( So -

K ) At St = So + Premium Paid, there is no profit no Loss At K < St < So + Premium Paid, Loss on underlying is

Increased by the amount of Premium Paid At St > So + Premium Paid, Profit is reduced by the amount of

Premium Paid

When to Use :- When the trader wants to hold the Stock but is worried about the fall in Price of the Stock

Current Price of the Stock So = 648Strike Price = K = 640Premium of Put Option P = Rs.11.9


PAY-OFF TABLE

Price of Stock on Expiry Day

Gain / Loss on Stock (St - So)

Premium Paid


Total Profit / Loss

620 -28 11.9 8.1 -19.9622 -26 11.9 6.1 -19.9624 -24 11.9 4.1 -19.9626 -22 11.9 2.1 -19.9628 -20 11.9 0.1 -19.9630 -18 11.9 -1.9 -19.9634 -14 11.9 -5.9 -19.9638 -10 11.9 -9.9 -19.9640 -8 11.9 -11.9 -19.9645 -3 11.9 -11.9 -14.9648 0 11.9 -11.9 -11.9652 4 11.9 -11.9 -7.9658 10 11.9 -11.9 -1.9660 12 11.9 -11.9 0.1665 17 11.9 -11.9 5.1670 22 11.9 -11.9 10.1675 27 11.9 -11.9 15.1680 32 11.9 -11.9 20.1


(5) Collar Strategy

DESCRIPTION :- Combination of Covered Call Writing & Protective Put Buying Long on Underlying, Short on Call Option at a high Price & long on Put Option at a lower Strike Price than that of Call Option

PAYOFF: At St = So +Premium Paid - Premium

Received, there is no profit no loss At St < or = Strike price of Put Kp,

Loss is fixed At St > or = Strike Price of Call (Kc),

Profit is fixed

WHEN TO USE: - A Trader holds an underlying & feels that the stock is very volatile & can go in any direction

Current Price of the Stock=648Strike Price of Put Option= 640Premium of Put Option = 11.9Strike Price of Call Option= 680Premium of Call Option =6.95


PAY-OFF TABLE

Price of Stock on

Expiry Day ( St )

Gain / Loss on

Stock (St - So)

Premium Paid

( P )

Profit / Loss on

Put Position


Profit / Loss on

Call Position

Total Profit / Loss

628 -20 11.9 0.1 6.95 6.95 -12.95632 -16 11.9 -3.9 6.95 6.95 -12.95635 -13 11.9 -6.9 6.95 6.95 -12.95640 -8 11.9 -11.9 6.95 6.95 -12.95645 -3 11.9 -11.9 6.95 6.95 -7.95648 0 11.9 -11.9 6.95 6.95 -4.95650 2 11.9 -11.9 6.95 6.95 -2.95653 5 11.9 -11.9 6.95 6.95 0.05658 10 11.9 -11.9 6.95 6.95 5.05662 14 11.9 -11.9 6.95 6.95 9.05665 17 11.9 -11.9 6.95 6.95 12.05668 20 11.9 -11.9 6.95 6.95 15.05672 24 11.9 -11.9 6.95 6.95 19.05675 27 11.9 -11.9 6.95 6.95 22.05678 30 11.9 -11.9 6.95 6.95 25.05680 32 11.9 -11.9 6.95 6.95 27.05685 37 11.9 -11.9 6.95 1.95 27.05688 40 11.9 -11.9 6.95 -1.05 27.05


(6) Short Combo

DESCRIPTION: - Long on Call Option at a high Strike Price & Short on Put at a Low Strike Price

PAYOFF: At St < Kp, Loss keeps on decreasing

linearly with rise in Price At Kc > St > Kp, Loss is Fixed At St > Kc, Profit keeps on increasing

linearly with rise in Price

WHEN TO USE: - Moderately Bullish Outlook

Current Price of the Stock =648

Strike Price of Call OptionKc=660

Premium of Call Optio = 14.45

Strike Price of Put OptionKp=640

Premium of Put Option=P= 11.9


PAY-OFF TABLEPrice of Stock on Expiry

Day ( St )

Premium Paid ( C )

Profit / Loss on

Call Position

Premium Put ( P )

Profit / Loss on

Put Position

Total Profit / Loss

630 14.45 -14.45 11.9 1.9 -12.55631 14.45 -14.45 11.9 2.9 -11.55632 14.45 -14.45 11.9 3.9 -10.55633 14.45 -14.45 11.9 4.9 -9.55634 14.45 -14.45 11.9 5.9 -8.55635 14.45 -14.45 11.9 6.9 -7.55636 14.45 -14.45 11.9 7.9 -6.55637 14.45 -14.45 11.9 8.9 -5.55638 14.45 -14.45 11.9 9.9 -4.55639 14.45 -14.45 11.9 10.9 -3.55640 14.45 -14.45 11.9 11.9 -2.55641 14.45 -14.45 11.9 11.9 -2.55642 14.45 -14.45 11.9 11.9 -2.55643 14.45 -14.45 11.9 11.9 -2.55644 14.45 -14.45 11.9 11.9 -2.55645 14.45 -14.45 11.9 11.9 -2.55646 14.45 -14.45 11.9 11.9 -2.55647 14.45 -14.45 11.9 11.9 -2.55648 14.45 -14.45 11.9 11.9 -2.55649 14.45 -14.45 11.9 11.9 -2.55650 14.45 -14.45 11.9 11.9 -2.55651 14.45 -14.45 11.9 11.9 -2.55652 14.45 -14.45 11.9 11.9 -2.55653 14.45 -14.45 11.9 11.9 -2.55654 14.45 -14.45 11.9 11.9 -2.55655 14.45 -14.45 11.9 11.9 -2.55656 14.45 -14.45 11.9 11.9 -2.55657 14.45 -14.45 11.9 11.9 -2.55658 14.45 -14.45 11.9 11.9 -2.55659 14.45 -14.45 11.9 11.9 -2.55660 14.45 -14.45 11.9 11.9 -2.55661 14.45 -13.45 11.9 11.9 -1.55662 14.45 -12.45 11.9 11.9 -0.55663 14.45 -11.45 11.9 11.9 0.45664 14.45 -10.45 11.9 11.9 1.45665 14.45 -9.45 11.9 11.9 2.45666 14.45 -8.45 11.9 11.9 3.45667 14.45 -7.45 11.9 11.9 4.45668 14.45 -6.45 11.9 11.9 5.45669 14.45 -5.45 11.9 11.9 6.45670 14.45 -4.45 11.9 11.9 7.45671 14.45 -3.45 11.9 11.9 8.45672 14.45 -2.45 11.9 11.9 9.45


673 14.45 -1.45 11.9 11.9 10.45674 14.45 -0.45 11.9 11.9 11.45675 14.45 0.55 11.9 11.9 12.45676 14.45 1.55 11.9 11.9 13.45677 14.45 2.55 11.9 11.9 14.45678 14.45 3.55 11.9 11.9 15.45679 14.45 4.55 11.9 11.9 16.45680 14.45 5.55 11.9 11.9 17.45681 14.45 6.55 11.9 11.9 18.45682 14.45 7.55 11.9 11.9 19.45683 14.45 8.55 11.9 11.9 20.45684 14.45 9.55 11.9 11.9 21.45685 14.45 10.55 11.9 11.9 22.45686 14.45 11.55 11.9 11.9 23.45687 14.45 12.55 11.9 11.9 24.45688 14.45 13.55 11.9 11.9 25.45689 14.45 14.55 11.9 11.9 26.45690 14.45 15.55 11.9 11.9 27.45691 14.45 16.55 11.9 11.9 28.45692 14.45 17.55 11.9 11.9 29.45693 14.45 18.55 11.9 11.9 30.45694 14.45 19.55 11.9 11.9 31.45695 14.45 20.55 11.9 11.9 32.45696 14.45 21.55 11.9 11.9 33.45697 14.45 22.55 11.9 11.9 34.45698 14.45 23.55 11.9 11.9 35.45699 14.45 24.55 11.9 11.9 36.45700 14.45 25.55 11.9 11.9 37.45


(7) Long Strap

DESCRIPTION: - Long on 2 Call & 1 Put at the same Strike Price

PAYOFF: As St approaches from low Price towards

K, Loss Increases linearly with St At St > K, Loss keeps on reducing & will

start making Profit

WHEN TO USE :- The chances of Market going up are more than the chances of going down

Current Price of the St=648Strike Price of Call Option=640 Premium of Call Option= 20.2Strike Price of Put Option=640 Premium of Put Option= 11.9.


PAY-OFF TABLE



StPremiu

m for Kc

Gain / Loss on

KcPremiu

m for KpGain / Loss

on KpTotal

Gain/Loss

630 40.4 -40.4 11.9 -1.9 -42.3631 40.4 -40.4 11.9 -2.9 -43.3632 40.4 -40.4 11.9 -3.9 -44.3633 40.4 -40.4 11.9 -4.9 -45.3634 40.4 -40.4 11.9 -5.9 -46.3635 40.4 -40.4 11.9 -6.9 -47.3636 40.4 -40.4 11.9 -7.9 -48.3637 40.4 -40.4 11.9 -8.9 -49.3638 40.4 -40.4 11.9 -9.9 -50.3639 40.4 -40.4 11.9 -10.9 -51.3640 40.4 -40.4 11.9 -11.9 -52.3641 40.4 -38.4 11.9 -11.9 -50.3642 40.4 -36.4 11.9 -11.9 -48.3643 40.4 -34.4 11.9 -11.9 -46.3644 40.4 -32.4 11.9 -11.9 -44.3645 40.4 -30.4 11.9 -11.9 -42.3646 40.4 -28.4 11.9 -11.9 -40.3647 40.4 -26.4 11.9 -11.9 -38.3648 40.4 -24.4 11.9 -11.9 -36.3649 40.4 -22.4 11.9 -11.9 -34.3650 40.4 -20.4 11.9 -11.9 -32.3651 40.4 -18.4 11.9 -11.9 -30.3652 40.4 -16.4 11.9 -11.9 -28.3653 40.4 -14.4 11.9 -11.9 -26.3654 40.4 -12.4 11.9 -11.9 -24.3655 40.4 -10.4 11.9 -11.9 -22.3656 40.4 -8.4 11.9 -11.9 -20.3657 40.4 -6.4 11.9 -11.9 -18.3658 40.4 -4.4 11.9 -11.9 -16.3659 40.4 -2.4 11.9 -11.9 -14.3660 40.4 -0.4 11.9 -11.9 -12.3661 40.4 1.6 11.9 -11.9 -10.3662 40.4 3.6 11.9 -11.9 -8.3663 40.4 5.6 11.9 -11.9 -6.3664 40.4 7.6 11.9 -11.9 -4.3665 40.4 9.6 11.9 -11.9 -2.3666 40.4 11.6 11.9 -11.9 -0.3667 40.4 13.6 11.9 -11.9 1.7668 40.4 15.6 11.9 -11.9 3.7669 40.4 17.6 11.9 -11.9 5.7670 40.4 19.6 11.9 -11.9 7.7671 40.4 21.6 11.9 -11.9 9.7

TRADING STRATEGIES USED FOR BEARISH OUTLOOK

(1) Long Put Ladder

DESCRIPTION: - Short on Put at a very low Strike , Short on Put at a High Strike Price & Long on Put at a Higher Strike Price

PAYOFF: At St <( K1- Difference Between K1 & K2 + Net PremiumPaid) , Loss Increases

Linearly with fall in St At St = ( K1- Difference Between K1 & K2 + Net PremiumPaid), there is no pfofit

no loss At K1 > St > ( K1- Difference Between K1 & K2 + Net PremiumPaid), Profit

increases linearly with the St At K2 > St > K1, Profit is fixed; i.e Difference between K1 & K2 - Net Premium Paid At K3 > St > K2 , Profit decreases linaerly with increase in Price At St > K3, Fixed Loss; i.e Net Premium Paid

WHEN T0 USE: - When u have a Bullish Outlook but not very BullishMarket expectation: Direction bullish/volatility bearish. Holder expects underlying to (continue to) be between strikes A and B and firmly believes that the market will not fall.Profit & loss characteristics at expiry:

Profit: Limited to the difference B-C, plus (minus) net credit (debit). Maximized between strikes A and B.Loss: Unlimited if underlying falls. At C or aboveBreak-even: Lower break-even reached when the intrinsic value of the purchased put C plus (minus) net credit (cost) is equal to the intrinsic value of the sold options A and B. Higher break-even reached when underlying falls below strike C by the same as the net cost of the position.

Current Price of the Stock 648Strike Price of Put OptK1=620Prem of Put Op=Rs.7.85Strike Price of Put OptK2=640PreM of Put OptK2= Rs.11.9Strike Price of Put OptK3=660Prem of Put OptK3= Rs.24.2


PAY-OFF TABLE

StPremiu

m for K1

Gain / Loss on

K1Premiu

m for K2

Gain / Loss on

K2Premiu

m for K3

Gain / Loss on

K3Total

Gain/Loss

590 7.85 -22.15 11.9 -38.1 24.2 45.8 -14.45591 7.85 -21.15 11.9 -37.1 24.2 44.8 -13.45592 7.85 -20.15 11.9 -36.1 24.2 43.8 -12.45593 7.85 -19.15 11.9 -35.1 24.2 42.8 -11.45594 7.85 -18.15 11.9 -34.1 24.2 41.8 -10.45595 7.85 -17.15 11.9 -33.1 24.2 40.8 -9.45596 7.85 -16.15 11.9 -32.1 24.2 39.8 -8.45597 7.85 -15.15 11.9 -31.1 24.2 38.8 -7.45598 7.85 -14.15 11.9 -30.1 24.2 37.8 -6.45599 7.85 -13.15 11.9 -29.1 24.2 36.8 -5.45600 7.85 -12.15 11.9 -28.1 24.2 35.8 -4.45601 7.85 -11.15 11.9 -27.1 24.2 34.8 -3.45602 7.85 -10.15 11.9 -26.1 24.2 33.8 -2.45603 7.85 -9.15 11.9 -25.1 24.2 32.8 -1.45604 7.85 -8.15 11.9 -24.1 24.2 31.8 -0.45605 7.85 -7.15 11.9 -23.1 24.2 30.8 0.55606 7.85 -6.15 11.9 -22.1 24.2 29.8 1.55607 7.85 -5.15 11.9 -21.1 24.2 28.8 2.55608 7.85 -4.15 11.9 -20.1 24.2 27.8 3.55609 7.85 -3.15 11.9 -19.1 24.2 26.8 4.55610 7.85 -2.15 11.9 -18.1 24.2 25.8 5.55611 7.85 -1.15 11.9 -17.1 24.2 24.8 6.55612 7.85 -0.15 11.9 -16.1 24.2 23.8 7.55613 7.85 0.85 11.9 -15.1 24.2 22.8 8.55614 7.85 1.85 11.9 -14.1 24.2 21.8 9.55615 7.85 2.85 11.9 -13.1 24.2 20.8 10.55616 7.85 3.85 11.9 -12.1 24.2 19.8 11.55617 7.85 4.85 11.9 -11.1 24.2 18.8 12.55618 7.85 5.85 11.9 -10.1 24.2 17.8 13.55619 7.85 6.85 11.9 -9.1 24.2 16.8 14.55620 7.85 7.85 11.9 -8.1 24.2 15.8 15.55621 7.85 7.85 11.9 -7.1 24.2 14.8 15.55622 7.85 7.85 11.9 -6.1 24.2 13.8 15.55623 7.85 7.85 11.9 -5.1 24.2 12.8 15.55624 7.85 7.85 11.9 -4.1 24.2 11.8 15.55625 7.85 7.85 11.9 -3.1 24.2 10.8 15.55626 7.85 7.85 11.9 -2.1 24.2 9.8 15.55627 7.85 7.85 11.9 -1.1 24.2 8.8 15.55628 7.85 7.85 11.9 -0.1 24.2 7.8 15.55629 7.85 7.85 11.9 0.9 24.2 6.8 15.55630 7.85 7.85 11.9 1.9 24.2 5.8 15.55631 7.85 7.85 11.9 2.9 24.2 4.8 15.55632 7.85 7.85 11.9 3.9 24.2 3.8 15.55


633 7.85 7.85 11.9 4.9 24.2 2.8 15.55634 7.85 7.85 11.9 5.9 24.2 1.8 15.55635 7.85 7.85 11.9 6.9 24.2 0.8 15.55636 7.85 7.85 11.9 7.9 24.2 -0.2 15.55637 7.85 7.85 11.9 8.9 24.2 -1.2 15.55638 7.85 7.85 11.9 9.9 24.2 -2.2 15.55639 7.85 7.85 11.9 10.9 24.2 -3.2 15.55640 7.85 7.85 11.9 11.9 24.2 -4.2 15.55641 7.85 7.85 11.9 11.9 24.2 -5.2 14.55642 7.85 7.85 11.9 11.9 24.2 -6.2 13.55643 7.85 7.85 11.9 11.9 24.2 -7.2 12.55644 7.85 7.85 11.9 11.9 24.2 -8.2 11.55645 7.85 7.85 11.9 11.9 24.2 -9.2 10.55646 7.85 7.85 11.9 11.9 24.2 -10.2 9.55647 7.85 7.85 11.9 11.9 24.2 -11.2 8.55648 7.85 7.85 11.9 11.9 24.2 -12.2 7.55649 7.85 7.85 11.9 11.9 24.2 -13.2 6.55650 7.85 7.85 11.9 11.9 24.2 -14.2 5.55651 7.85 7.85 11.9 11.9 24.2 -15.2 4.55652 7.85 7.85 11.9 11.9 24.2 -16.2 3.55653 7.85 7.85 11.9 11.9 24.2 -17.2 2.55654 7.85 7.85 11.9 11.9 24.2 -18.2 1.55655 7.85 7.85 11.9 11.9 24.2 -19.2 0.55656 7.85 7.85 11.9 11.9 24.2 -20.2 -0.45657 7.85 7.85 11.9 11.9 24.2 -21.2 -1.45658 7.85 7.85 11.9 11.9 24.2 -22.2 -2.45659 7.85 7.85 11.9 11.9 24.2 -23.2 -3.45660 7.85 7.85 11.9 11.9 24.2 -24.2 -4.45661 7.85 7.85 11.9 11.9 24.2 -24.2 -4.45662 7.85 7.85 11.9 11.9 24.2 -24.2 -4.45


(2) Bear Spread

DESCRIPTION: - Short on 1 Put at low Strike price K1 & Long on 1 Put at higher strike price K2

PAYOFF: At St ≤ K1, Profit is Fixed; i.e K2-K1 - Net Premium Paid At K2 ≥ St ≥K1,Profit Reduces linearly with increase in

Price At St > K2, loss is Fixed ; i.e Net Premium paid

Market expectation: Market bearish/volatility neutral. The spread has the advantage of being cheaper to establish than the purchase of a single put, as the premium received from the sold put reduces the overall cost. The spread offers a limited loss exposure if the underlying rises, and a limited profit if the underlying falls.

When to Use :- Mildly Bearish Perspective

Profit & loss characteristics at expiry:Profit: Limited to the difference between the two strikes minus net premium cost. Maximum profit occurs where underlying falls to the level of the lower strike A or below.Loss: Limited to the initial premium paid in establishing the position. Maximum loss occurs where the underlying rises to the level of the higher strike B or above.Break-even: Reached when the underlying is below strike price B by the same amount as the net cost of establishing the position.

Current Price of the Stock =648Strike Price of Put OptK1=620Premium of Put OptK1= Rs.7.85Strike Price of Put OptK2=640Premium of Put OptK2= Rs.11.9

PAY-OFF TABLE

St Premiu Gain / Premiu Gain / Total


m for Kp1

Loss on Kp1

m for Kp2

Loss on Kp2 Gain/Loss

600 7.85 -12.15 11.9 28.1 15.95601 7.85 -11.15 11.9 27.1 15.95602 7.85 -10.15 11.9 26.1 15.95603 7.85 -9.15 11.9 25.1 15.95604 7.85 -8.15 11.9 24.1 15.95605 7.85 -7.15 11.9 23.1 15.95606 7.85 -6.15 11.9 22.1 15.95607 7.85 -5.15 11.9 21.1 15.95608 7.85 -4.15 11.9 20.1 15.95609 7.85 -3.15 11.9 19.1 15.95610 7.85 -2.15 11.9 18.1 15.95611 7.85 -1.15 11.9 17.1 15.95612 7.85 -0.15 11.9 16.1 15.95613 7.85 0.85 11.9 15.1 15.95614 7.85 1.85 11.9 14.1 15.95615 7.85 2.85 11.9 13.1 15.95616 7.85 3.85 11.9 12.1 15.95617 7.85 4.85 11.9 11.1 15.95618 7.85 5.85 11.9 10.1 15.95619 7.85 6.85 11.9 9.1 15.95620 7.85 7.85 11.9 8.1 15.95621 7.85 7.85 11.9 7.1 14.95622 7.85 7.85 11.9 6.1 13.95623 7.85 7.85 11.9 5.1 12.95624 7.85 7.85 11.9 4.1 11.95625 7.85 7.85 11.9 3.1 10.95626 7.85 7.85 11.9 2.1 9.95627 7.85 7.85 11.9 1.1 8.95628 7.85 7.85 11.9 0.1 7.95629 7.85 7.85 11.9 -0.9 6.95630 7.85 7.85 11.9 -1.9 5.95631 7.85 7.85 11.9 -2.9 4.95632 7.85 7.85 11.9 -3.9 3.95633 7.85 7.85 11.9 -4.9 2.95634 7.85 7.85 11.9 -5.9 1.95635 7.85 7.85 11.9 -6.9 0.95636 7.85 7.85 11.9 -7.9 -0.05637 7.85 7.85 11.9 -8.9 -1.05638 7.85 7.85 11.9 -9.9 -2.05639 7.85 7.85 11.9 -10.9 -3.05640 7.85 7.85 11.9 -11.9 -4.05641 7.85 7.85 11.9 -11.9 -4.05642 7.85 7.85 11.9 -11.9 -4.05643 7.85 7.85 11.9 -11.9 -4.05644 7.85 7.85 11.9 -11.9 -4.05645 7.85 7.85 11.9 -11.9 -4.05646 7.85 7.85 11.9 -11.9 -4.05


647 7.85 7.85 11.9 -11.9 -4.05648 7.85 7.85 11.9 -11.9 -4.05649 7.85 7.85 11.9 -11.9 -4.05650 7.85 7.85 11.9 -11.9 -4.05


(3) Covered Put Writing

DESCRIPTION: - Short Position in the underlying & Short Position on Put at a low Strike Price

PAYOFF: At St = So + Premium Received, there is no profit , No Loss At St< K or St = K, Profit is fixed; i,e Gain on Underlying +/- Gain / Loss on Option

Position At St > K, Profit on Underlying is Increased by the amount of Premium But only

upto (So + Premium Received), after that there is loss

WHEN TO USE: - When the Trader is Bearish

Current Price of the Stock = 648Strike Price = K = 640Premium of Put Option = Rs.11.9

PAY-OFF TABLEPrice of Stock on

Expiry Day ( St )

Gain / Loss on Stock

(So - St)



Total Profit / Loss

625 23 11.9 -3.1 19.9628 20 11.9 -0.1 19.9630 18 11.9 1.9 19.9635 13 11.9 6.9 19.9638 10 11.9 9.9 19.9640 8 11.9 11.9 19.9642 6 11.9 11.9 17.9645 3 11.9 11.9 14.9648 0 11.9 11.9 11.9652 -4 11.9 11.9 7.9658 -10 11.9 11.9 1.9660 -12 11.9 11.9 -0.1665 -17 11.9 11.9 -5.1670 -22 11.9 11.9 -10.1675 -27 11.9 11.9 -15.1


(4) Protective Call Buying

DESCRIPTION: - Short on Underlying & Long on Call for a Higher Strike Price\

PAYOFF: At St = So - Premium Paid, there is no Profit no Loss At St =So or St > K, Loss is Fixed At K > St < So, Loss on Underlying is increased by the

amount of Premium At St < So , Profit on Underlying is reduced by the

amount of Premium Paid

When to Use: - A Trader has a Short Position in the Underlying & worries that the Price will Rise

Current Price of the Stock = 648

Strike Price = K = 660

Premium of Call Opt= Rs.14.45

PAY-OFF TABLE


Price of Stock on

Expiry Day ( St )


(So - St)

Premium Paid

( C )


Total Profit / Loss

620 28 14.45 -14.45 13.55625 23 14.45 -14.45 8.55628 20 14.45 -14.45 5.55633 15 14.45 -14.45 0.55638 10 14.45 -14.45 -4.45642 6 14.45 -14.45 -8.45645 3 14.45 -14.45 -11.45648 0 14.45 -14.45 -14.45652 -4 14.45 -14.45 -18.45655 -7 14.45 -14.45 -21.45660 -12 14.45 -14.45 -26.45665 -17 14.45 -9.45 -26.45668 -20 14.45 -6.45 -26.45672 -24 14.45 -2.45 -26.45675 -27 14.45 0.55 -26.45680 -32 14.45 5.55 -26.45


(5) Reverse Collar Strategy

DESCRIPTION: - Short on Underlying, Long on Call at higher Price & Short on Put at a low price.

PAYOFF: At St = So -

Premium Paid, there is no profit no loss

At St ≤ Kp, Pofit is fixed

At St ≥ Kc , Loss is fixed

When to Use: - When u have a bearish Outlook

Current Price of the Stock = 648Strike Price of Put Option = 640Premium of Put Option = Rs.11.9Strike Price of Call Option = 660Premium of Call Option =14.45



Expiry Day ( St )


(So - St)

Premium Paid

( C )

Profit / Loss on

Call Position

Premium Received ( P )

Profit / Loss on

Put Position

Total Profit / Loss

625 23 14.45 -14.45 11.9 -3.1 5.45630 18 14.45 -14.45 11.9 1.9 5.45635 13 14.45 -14.45 11.9 6.9 5.45640 8 14.45 -14.45 11.9 11.9 5.45642 6 14.45 -14.45 11.9 11.9 3.45645 3 14.45 -14.45 11.9 11.9 0.45648 0 14.45 -14.45 11.9 11.9 -2.55652 -4 14.45 -14.45 11.9 11.9 -6.55655 -7 14.45 -14.45 11.9 11.9 -9.55658 -10 14.45 -14.45 11.9 11.9 -12.55660 -12 14.45 -14.45 11.9 11.9 -14.55663 -15 14.45 -11.45 11.9 11.9 -14.55668 -20 14.45 -6.45 11.9 11.9 -14.55672 -24 14.45 -2.45 11.9 11.9 -14.55675 -27 14.45 0.55 11.9 11.9 -14.55680 -32 14.45 5.55 11.9 11.9 -14.55


(6) Long Strip

DESCRIPTION: - Long on 1 Call Option & 2 Put Option at the same Strike Price

PAYOFF: As St approaches from low Price towards

K, Profit Decreases & starts to make Losses

At St > K, Loss keeps on reducing & will start making Profit

WHEN TO USE :-The chances of Market going down are more than the chances of going up

Current Price of the St =648

Strike Price of Call = 660

Prem of Call Opt=c=Rs.14.45

Strike Price of Put Opt= 660

Prem of Put Opt=P=Rs.24.25


PAY-OFF TABLE

StPremiu

m for Kc

Gain / Loss on

KcPremiu

m for Kp

Gain / Loss on

KpTotal

Gain/Loss

620 14.45 -14.45 48.5 31.5 17.05621 14.45 -14.45 48.5 29.5 15.05622 14.45 -14.45 48.5 27.5 13.05623 14.45 -14.45 48.5 25.5 11.05624 14.45 -14.45 48.5 23.5 9.05625 14.45 -14.45 48.5 21.5 7.05626 14.45 -14.45 48.5 19.5 5.05627 14.45 -14.45 48.5 17.5 3.05628 14.45 -14.45 48.5 15.5 1.05629 14.45 -14.45 48.5 13.5 -0.95630 14.45 -14.45 48.5 11.5 -2.95631 14.45 -14.45 48.5 9.5 -4.95632 14.45 -14.45 48.5 7.5 -6.95633 14.45 -14.45 48.5 5.5 -8.95634 14.45 -14.45 48.5 3.5 -10.95635 14.45 -14.45 48.5 1.5 -12.95636 14.45 -14.45 48.5 -0.5 -14.95637 14.45 -14.45 48.5 -2.5 -16.95638 14.45 -14.45 48.5 -4.5 -18.95639 14.45 -14.45 48.5 -6.5 -20.95640 14.45 -14.45 48.5 -8.5 -22.95641 14.45 -14.45 48.5 -10.5 -24.95642 14.45 -14.45 48.5 -12.5 -26.95643 14.45 -14.45 48.5 -14.5 -28.95644 14.45 -14.45 48.5 -16.5 -30.95645 14.45 -14.45 48.5 -18.5 -32.95646 14.45 -14.45 48.5 -20.5 -34.95647 14.45 -14.45 48.5 -22.5 -36.95648 14.45 -14.45 48.5 -24.5 -38.95649 14.45 -14.45 48.5 -26.5 -40.95650 14.45 -14.45 48.5 -28.5 -42.95651 14.45 -14.45 48.5 -30.5 -44.95652 14.45 -14.45 48.5 -32.5 -46.95653 14.45 -14.45 48.5 -34.5 -48.95654 14.45 -14.45 48.5 -36.5 -50.95655 14.45 -14.45 48.5 -38.5 -52.95656 14.45 -14.45 48.5 -40.5 -54.95657 14.45 -14.45 48.5 -42.5 -56.95658 14.45 -14.45 48.5 -44.5 -58.95659 14.45 -14.45 48.5 -46.5 -60.95660 14.45 -14.45 48.5 -48.5 -62.95661 14.45 -13.45 48.5 -48.5 -61.95


662 14.45 -12.45 48.5 -48.5 -60.95663 14.45 -11.45 48.5 -48.5 -59.95664 14.45 -10.45 48.5 -48.5 -58.95665 14.45 -9.45 48.5 -48.5 -57.95666 14.45 -8.45 48.5 -48.5 -56.95667 14.45 -7.45 48.5 -48.5 -55.95668 14.45 -6.45 48.5 -48.5 -54.95669 14.45 -5.45 48.5 -48.5 -53.95670 14.45 -4.45 48.5 -48.5 -52.95671 14.45 -3.45 48.5 -48.5 -51.95672 14.45 -2.45 48.5 -48.5 -50.95


TRADING STRATEGIES USED FOR RANGEBOUND OUTLOOK(1)Long Condor

DESCRIPTION: - Long on Call at a Low Strike Price K1, Short on Call at high Strike Price K2 & K3, & Long on Call at a Higher Strike Price K4

PAYOFF: At St < K1, Loss is Fixed; i.e Net Premium

Paid At K2 > St >K1,Profit Increases linearly with

Price At K3 > St > K2, Profit is Fixed At K4 > St > K3 , Profit reduces linearly with

increase in Price At St > K4, Loss is Fixed ; i.e Net Premium

Paid

When to Use :- When a Trader is Confident of a Range bound St ;i.e between K3 & K4

Market expectation: Direction neutral/volatility bearish. A Long Condor allows for a greater degree of volatility and hence a wider band of profit potential than a Long Butterfly.

Profit & loss characteristics at expiry:

Profit: Maximized where the underlying settles between the two strike prices B and C, but will decline as the market rises, or falls beyond these strikes.Loss: Occurs if the underlying rises towards strike D or falls towards strike A. Will be limited to the cost of establishing the position for either a rise or a fall in the underlying.Break-even: Lower break-even point reached when underlying reaches the lower strike price A plus the cost of establishing the spread, and the higher break-even when the underlying reaches the level of the higher strike D minus the cost of establishing the spread.

Current Price of the Stock =So= 648Strike Price of Call Option=K1= 620Premium of Call Option =K1= Rs. 37.65Strike Price of Call Option=K2= 640Premium of Call Option =K2= Rs. 20.2Strike Price of Call Option=K3= 660Premium of Call Option =K3= Rs. 14.45Strike Price of Call Option=K4= 680Premium of Call Option =K4= Rs. 6.95


PAY-OFF TABLE

St

Premium

for K1

Gain / Loss

on K1

Premium

for K2

Gain / Loss on

K2

Premium

for K3

Gain / Loss

on K3

Premium

for K4

Gain / Loss

on K4

Total

Gain/Loss

615 37.65 -37.65 20.2 20.2 14.45 14.45 6.95 -6.95 -9.95

616 37.65 -37.65 20.2 20.2 14.45 14.45 6.95 -6.95 -9.95

617 37.65 -37.65 20.2 20.2 14.45 14.45 6.95 -6.95 -9.95

618 37.65 -37.65 20.2 20.2 14.45 14.45 6.95 -6.95 -9.95

619 37.65 -37.65 20.2 20.2 14.45 14.45 6.95 -6.95 -9.95

620 37.65 -37.65 20.2 20.2 14.45 14.45 6.95 -6.95 -9.95

621 37.65 -36.65 20.2 20.2 14.45 14.45 6.95 -6.95 -8.95

622 37.65 -35.65 20.2 20.2 14.45 14.45 6.95 -6.95 -7.95

623 37.65 -34.65 20.2 20.2 14.45 14.45 6.95 -6.95 -6.95

624 37.65 -33.65 20.2 20.2 14.45 14.45 6.95 -6.95 -5.95

625 37.65 -32.65 20.2 20.2 14.45 14.45 6.95 -6.95 -4.95

626 37.65 -31.65 20.2 20.2 14.45 14.45 6.95 -6.95 -3.95

627 37.65 -30.65 20.2 20.2 14.45 14.45 6.95 -6.95 -2.95

628 37.65 -29.65 20.2 20.2 14.45 14.45 6.95 -6.95 -1.95

629 37.65 -28.65 20.2 20.2 14.45 14.45 6.95 -6.95 -0.95

630 37.65 -27.65 20.2 20.2 14.45 14.45 6.95 -6.95 0.05

631 37.65 -26.65 20.2 20.2 14.45 14.45 6.95 -6.95 1.05

632 37.65 -25.65 20.2 20.2 14.45 14.45 6.95 -6.95 2.05

633 37.65 -24.65 20.2 20.2 14.45 14.45 6.95 -6.95 3.05

634 37.65 -23.65 20.2 20.2 14.45 14.45 6.95 -6.95 4.05

635 37.65 -22.65 20.2 20.2 14.45 14.45 6.95 -6.95 5.05

636 37.65 -21.65 20.2 20.2 14.45 14.45 6.95 -6.95 6.05

637 37.65 -20.65 20.2 20.2 14.45 14.45 6.95 -6.95 7.05

638 37.65 -19.65 20.2 20.2 14.45 14.45 6.95 -6.95 8.05

639 37.65 -18.65 20.2 20.2 14.45 14.45 6.95 -6.95 9.05

640 37.65 -17.65 20.2 20.2 14.45 14.45 6.95 -6.95 10.05

641 37.65 -16.65 20.2 19.2 14.45 14.45 6.95 -6.95 10.05

642 37.65 -15.65 20.2 18.2 14.45 14.45 6.95 -6.95 10.05

643 37.65 -14.65 20.2 17.2 14.45 14.45 6.95 -6.95 10.05

644 37.65 -13.65 20.2 16.2 14.45 14.45 6.95 -6.95 10.05

645 37.65 -12.65 20.2 15.2 14.45 14.45 6.95 -6.95 10.05

646 37.65 -11.65 20.2 14.2 14.45 14.45 6.95 -6.95 10.05

647 37.65 -10.65 20.2 13.2 14.45 14.45 6.95 -6.95 10.05

648 37.65 -9.65 20.2 12.2 14.45 14.45 6.95 -6.95 10.05

649 37.65 -8.65 20.2 11.2 14.45 14.45 6.95 -6.95 10.05

650 37.65 -7.65 20.2 10.2 14.45 14.45 6.95 -6.95 10.05


651 37.65 -6.65 20.2 9.2 14.45 14.45 6.95 -6.95 10.05

652 37.65 -5.65 20.2 8.2 14.45 14.45 6.95 -6.95 10.05

653 37.65 -4.65 20.2 7.2 14.45 14.45 6.95 -6.95 10.05

654 37.65 -3.65 20.2 6.2 14.45 14.45 6.95 -6.95 10.05

655 37.65 -2.65 20.2 5.2 14.45 14.45 6.95 -6.95 10.05

656 37.65 -1.65 20.2 4.2 14.45 14.45 6.95 -6.95 10.05

657 37.65 -0.65 20.2 3.2 14.45 14.45 6.95 -6.95 10.05

658 37.65 0.35 20.2 2.2 14.45 14.45 6.95 -6.95 10.05

659 37.65 1.35 20.2 1.2 14.45 14.45 6.95 -6.95 10.05

660 37.65 2.35 20.2 0.2 14.45 14.45 6.95 -6.95 10.05

661 37.65 3.35 20.2 -0.8 14.45 13.45 6.95 -6.95 9.05

662 37.65 4.35 20.2 -1.8 14.45 12.45 6.95 -6.95 8.05

663 37.65 5.35 20.2 -2.8 14.45 11.45 6.95 -6.95 7.05

664 37.65 6.35 20.2 -3.8 14.45 10.45 6.95 -6.95 6.05

665 37.65 7.35 20.2 -4.8 14.45 9.45 6.95 -6.95 5.05

666 37.65 8.35 20.2 -5.8 14.45 8.45 6.95 -6.95 4.05

667 37.65 9.35 20.2 -6.8 14.45 7.45 6.95 -6.95 3.05

668 37.65 10.35 20.2 -7.8 14.45 6.45 6.95 -6.95 2.05

669 37.65 11.35 20.2 -8.8 14.45 5.45 6.95 -6.95 1.05

670 37.65 12.35 20.2 -9.8 14.45 4.45 6.95 -6.95 0.05

671 37.65 13.35 20.2 -10.8 14.45 3.45 6.95 -6.95 -0.95

672 37.65 14.35 20.2 -11.8 14.45 2.45 6.95 -6.95 -1.95

673 37.65 15.35 20.2 -12.8 14.45 1.45 6.95 -6.95 -2.95

674 37.65 16.35 20.2 -13.8 14.45 0.45 6.95 -6.95 -3.95

675 37.65 17.35 20.2 -14.8 14.45 -0.55 6.95 -6.95 -4.95

676 37.65 18.35 20.2 -15.8 14.45 -1.55 6.95 -6.95 -5.95

677 37.65 19.35 20.2 -16.8 14.45 -2.55 6.95 -6.95 -6.95

678 37.65 20.35 20.2 -17.8 14.45 -3.55 6.95 -6.95 -7.95

679 37.65 21.35 20.2 -18.8 14.45 -4.55 6.95 -6.95 -8.95

680 37.65 22.35 20.2 -19.8 14.45 -5.55 6.95 -6.95 -9.95

681 37.65 23.35 20.2 -20.8 14.45 -6.55 6.95 -5.95 -9.95

682 37.65 24.35 20.2 -21.8 14.45 -7.55 6.95 -4.95 -9.95

683 37.65 25.35 20.2 -22.8 14.45 -8.55 6.95 -3.95 -9.95

684 37.65 26.35 20.2 -23.8 14.45 -9.55 6.95 -2.95 -9.95

685 37.65 27.35 20.2 -24.8 14.45 -10.55 6.95 -1.95 -9.95


(2)Double Top

DESCRIPTION: - Short on 2 Put at low Strike Price K1, Long on 1 Call & 1 Put at higher Strike Price K2 & Short 2 Call at Higher Strike Price K3

PAYOFF: St < Kp1, Loss reduces Linearly with

rise in St and becomes Profit At Kc2 > St> Kp1, Profit Reduces

Linearly with rise in St At Kc3 > St > Kc2, Profit increases

linearly with St At St > Kc3, Profit increases linearly

with rise in St

WHEN TO USE: - A Trader is confident of a Range Bound St, not too Volatile

Current Price of the Stock =So= 648Strike Price of Put Option=Kp1= 640Premium of Put Option =K1= Rs. 11.9Strike Price of Call Option=Kc2= 660Premium of Call Option =K2= Rs. 14.45Strike Price of Put Option=Kp2= 660Premium of Put Option =Kp2= Rs. 24.25Strike Price of Call Option=Kc3= 680Premium of Call Option =Kc3= Rs. 6.95


PAY-OFF TABLE

StPremium for Kp1

Gain / Loss on Kp1

Premium for Kc2

Gain / Loss on Kc2

Premium for Kp2

Gain / Loss on Kp2

Premium for Kc3

Gain / Loss on Kc3

Total Gain/Loss

615 23.8 -26.2 14.45 -14.45 24.25 20.75 13.9 13.9 -6

616 23.8 -24.2 14.45 -14.45 24.25 19.75 13.9 13.9 -5

617 23.8 -22.2 14.45 -14.45 24.25 18.75 13.9 13.9 -4

618 23.8 -20.2 14.45 -14.45 24.25 17.75 13.9 13.9 -3

619 23.8 -18.2 14.45 -14.45 24.25 16.75 13.9 13.9 -2

620 23.8 -16.2 14.45 -14.45 24.25 15.75 13.9 13.9 -1

621 23.8 -14.2 14.45 -14.45 24.25 14.75 13.9 13.9 0

622 23.8 -12.2 14.45 -14.45 24.25 13.75 13.9 13.9 1

623 23.8 -10.2 14.45 -14.45 24.25 12.75 13.9 13.9 2

624 23.8 -8.2 14.45 -14.45 24.25 11.75 13.9 13.9 3

625 23.8 -6.2 14.45 -14.45 24.25 10.75 13.9 13.9 4

626 23.8 -4.2 14.45 -14.45 24.25 9.75 13.9 13.9 5

627 23.8 -2.2 14.45 -14.45 24.25 8.75 13.9 13.9 6

628 23.8 -0.2 14.45 -14.45 24.25 7.75 13.9 13.9 7

629 23.8 1.8 14.45 -14.45 24.25 6.75 13.9 13.9 8

630 23.8 3.8 14.45 -14.45 24.25 5.75 13.9 13.9 9

631 23.8 5.8 14.45 -14.45 24.25 4.75 13.9 13.9 10

632 23.8 7.8 14.45 -14.45 24.25 3.75 13.9 13.9 11

633 23.8 9.8 14.45 -14.45 24.25 2.75 13.9 13.9 12

634 23.8 11.8 14.45 -14.45 24.25 1.75 13.9 13.9 13

635 23.8 13.8 14.45 -14.45 24.25 0.75 13.9 13.9 14

636 23.8 15.8 14.45 -14.45 24.25 -0.25 13.9 13.9 15

637 23.8 17.8 14.45 -14.45 24.25 -1.25 13.9 13.9 16

638 23.8 19.8 14.45 -14.45 24.25 -2.25 13.9 13.9 17

639 23.8 21.8 14.45 -14.45 24.25 -3.25 13.9 13.9 18

640 23.8 23.8 14.45 -14.45 24.25 -4.25 13.9 13.9 19

641 23.8 23.8 14.45 -14.45 24.25 -5.25 13.9 13.9 18

642 23.8 23.8 14.45 -14.45 24.25 -6.25 13.9 13.9 17

643 23.8 23.8 14.45 -14.45 24.25 -7.25 13.9 13.9 16

644 23.8 23.8 14.45 -14.45 24.25 -8.25 13.9 13.9 15

645 23.8 23.8 14.45 -14.45 24.25 -9.25 13.9 13.9 14

646 23.8 23.8 14.45 -14.45 24.25 -10.25 13.9 13.9 13

647 23.8 23.8 14.45 -14.45 24.25 -11.25 13.9 13.9 12

648 23.8 23.8 14.45 -14.45 24.25 -12.25 13.9 13.9 11

649 23.8 23.8 14.45 -14.45 24.25 -13.25 13.9 13.9 10

650 23.8 23.8 14.45 -14.45 24.25 -14.25 13.9 13.9 9

651 23.8 23.8 14.45 -14.45 24.25 -15.25 13.9 13.9 8

652 23.8 23.8 14.45 -14.45 24.25 -16.25 13.9 13.9 7

653 23.8 23.8 14.45 -14.45 24.25 -17.25 13.9 13.9 6

654 23.8 23.8 14.45 -14.45 24.25 -18.25 13.9 13.9 5

655 23.8 23.8 14.45 -14.45 24.25 -19.25 13.9 13.9 4

656 23.8 23.8 14.45 -14.45 24.25 -20.25 13.9 13.9 3


657 23.8 23.8 14.45 -14.45 24.25 -21.25 13.9 13.9 2

658 23.8 23.8 14.45 -14.45 24.25 -22.25 13.9 13.9 1

659 23.8 23.8 14.45 -14.45 24.25 -23.25 13.9 13.9 0

660 23.8 23.8 14.45 -14.45 24.25 -24.25 13.9 13.9 -1

661 23.8 23.8 14.45 -13.45 24.25 -24.25 13.9 13.9 0

662 23.8 23.8 14.45 -12.45 24.25 -24.25 13.9 13.9 1

663 23.8 23.8 14.45 -11.45 24.25 -24.25 13.9 13.9 2

664 23.8 23.8 14.45 -10.45 24.25 -24.25 13.9 13.9 3

665 23.8 23.8 14.45 -9.45 24.25 -24.25 13.9 13.9 4

666 23.8 23.8 14.45 -8.45 24.25 -24.25 13.9 13.9 5

667 23.8 23.8 14.45 -7.45 24.25 -24.25 13.9 13.9 6

668 23.8 23.8 14.45 -6.45 24.25 -24.25 13.9 13.9 7

669 23.8 23.8 14.45 -5.45 24.25 -24.25 13.9 13.9 8

670 23.8 23.8 14.45 -4.45 24.25 -24.25 13.9 13.9 9

671 23.8 23.8 14.45 -3.45 24.25 -24.25 13.9 13.9 10

672 23.8 23.8 14.45 -2.45 24.25 -24.25 13.9 13.9 11

673 23.8 23.8 14.45 -1.45 24.25 -24.25 13.9 13.9 12

674 23.8 23.8 14.45 -0.45 24.25 -24.25 13.9 13.9 13

675 23.8 23.8 14.45 0.55 24.25 -24.25 13.9 13.9 14

676 23.8 23.8 14.45 1.55 24.25 -24.25 13.9 13.9 15

677 23.8 23.8 14.45 2.55 24.25 -24.25 13.9 13.9 16

678 23.8 23.8 14.45 3.55 24.25 -24.25 13.9 13.9 17

679 23.8 23.8 14.45 4.55 24.25 -24.25 13.9 13.9 18

680 23.8 23.8 14.45 5.55 24.25 -24.25 13.9 13.9 19

681 23.8 23.8 14.45 6.55 24.25 -24.25 13.9 11.9 18

682 23.8 23.8 14.45 7.55 24.25 -24.25 13.9 9.9 17

683 23.8 23.8 14.45 8.55 24.25 -24.25 13.9 7.9 16

684 23.8 23.8 14.45 9.55 24.25 -24.25 13.9 5.9 15

685 23.8 23.8 14.45 10.55 24.25 -24.25 13.9 3.9 14

686 23.8 23.8 14.45 11.55 24.25 -24.25 13.9 1.9 13

687 23.8 23.8 14.45 12.55 24.25 -24.25 13.9 -0.1 12

688 23.8 23.8 14.45 13.55 24.25 -24.25 13.9 -2.1 11

689 23.8 23.8 14.45 14.55 24.25 -24.25 13.9 -4.1 10

690 23.8 23.8 14.45 15.55 24.25 -24.25 13.9 -6.1 9

691 23.8 23.8 14.45 16.55 24.25 -24.25 13.9 -8.1 8

692 23.8 23.8 14.45 17.55 24.25 -24.25 13.9 -10.1 7

693 23.8 23.8 14.45 18.55 24.25 -24.25 13.9 -12.1 6

694 23.8 23.8 14.45 19.55 24.25 -24.25 13.9 -14.1 5

695 23.8 23.8 14.45 20.55 24.25 -24.25 13.9 -16.1 4

696 23.8 23.8 14.45 21.55 24.25 -24.25 13.9 -18.1 3

697 23.8 23.8 14.45 22.55 24.25 -24.25 13.9 -20.1 2

698 23.8 23.8 14.45 23.55 24.25 -24.25 13.9 -22.1 1

699 23.8 23.8 14.45 24.55 24.25 -24.25 13.9 -24.1 0

700 23.8 23.8 14.45 25.55 24.25 -24.25 13.9 -26.1 -1

701 23.8 23.8 14.45 26.55 24.25 -24.25 13.9 -28.1 -2

702 23.8 23.8 14.45 27.55 24.25 -24.25 13.9 -30.1 -3

703 23.8 23.8 14.45 28.55 24.25 -24.25 13.9 -32.1 -4

704 23.8 23.8 14.45 29.55 24.25 -24.25 13.9 -34.1 -5


(3) Christmas Tree

DESCRIPTION: - Long on 1 Call at low Strike Price K1, Short on 1 Call at higher Strike Price K2 & Short 1 Call at Higher Strike Price K3

PAYOFF: St ≤ Kc1, there is fixed profit of net premium Received At Kc2 ≥ St ≥ Kc1, Profit increases Linearly with rise in

St At Kc3 ≥ St ≥ Kc2, There is fixed Profit of Net Premium

received + K3- K2 At St > Kc3, Profit reduces linearly with rise in St

WHEN TO USE :- A Trader is confident of a Range Bound St, not too Volatile

Current Price of the Stock =So= 648Strike Price of Call Option=Kc1= 640Premium of Call Option =K1= Rs. 20.2Strike Price of Call Option=Kc2= 660Premium of Call Option =K2= Rs. 14.45Strike Price of Call Option=Kc3= 680Premium of Call Option =Kc3= Rs. 6.95


PAY-OFF TABLE

St

Premium for Kc1

Gain / Loss on

Kc1

Premium for Kc2

Gain / Loss on

Kc2

Premium for Kc3

Gain / Loss on

Kc3Total

Gain/Loss

635 20.2 -20.2 14.45 14.45 6.95 6.95 1.2636 20.2 -20.2 14.45 14.45 6.95 6.95 1.2637 20.2 -20.2 14.45 14.45 6.95 6.95 1.2638 20.2 -20.2 14.45 14.45 6.95 6.95 1.2639 20.2 -20.2 14.45 14.45 6.95 6.95 1.2640 20.2 -20.2 14.45 14.45 6.95 6.95 1.2641 20.2 -19.2 14.45 14.45 6.95 6.95 2.2642 20.2 -18.2 14.45 14.45 6.95 6.95 3.2643 20.2 -17.2 14.45 14.45 6.95 6.95 4.2644 20.2 -16.2 14.45 14.45 6.95 6.95 5.2645 20.2 -15.2 14.45 14.45 6.95 6.95 6.2646 20.2 -14.2 14.45 14.45 6.95 6.95 7.2647 20.2 -13.2 14.45 14.45 6.95 6.95 8.2648 20.2 -12.2 14.45 14.45 6.95 6.95 9.2649 20.2 -11.2 14.45 14.45 6.95 6.95 10.2650 20.2 -10.2 14.45 14.45 6.95 6.95 11.2651 20.2 -9.2 14.45 14.45 6.95 6.95 12.2652 20.2 -8.2 14.45 14.45 6.95 6.95 13.2653 20.2 -7.2 14.45 14.45 6.95 6.95 14.2654 20.2 -6.2 14.45 14.45 6.95 6.95 15.2655 20.2 -5.2 14.45 14.45 6.95 6.95 16.2656 20.2 -4.2 14.45 14.45 6.95 6.95 17.2657 20.2 -3.2 14.45 14.45 6.95 6.95 18.2658 20.2 -2.2 14.45 14.45 6.95 6.95 19.2659 20.2 -1.2 14.45 14.45 6.95 6.95 20.2660 20.2 -0.2 14.45 14.45 6.95 6.95 21.2661 20.2 0.8 14.45 13.45 6.95 6.95 21.2662 20.2 1.8 14.45 12.45 6.95 6.95 21.2663 20.2 2.8 14.45 11.45 6.95 6.95 21.2664 20.2 3.8 14.45 10.45 6.95 6.95 21.2665 20.2 4.8 14.45 9.45 6.95 6.95 21.2666 20.2 5.8 14.45 8.45 6.95 6.95 21.2667 20.2 6.8 14.45 7.45 6.95 6.95 21.2668 20.2 7.8 14.45 6.45 6.95 6.95 21.2669 20.2 8.8 14.45 5.45 6.95 6.95 21.2670 20.2 9.8 14.45 4.45 6.95 6.95 21.2671 20.2 10.8 14.45 3.45 6.95 6.95 21.2672 20.2 11.8 14.45 2.45 6.95 6.95 21.2673 20.2 12.8 14.45 1.45 6.95 6.95 21.2674 20.2 13.8 14.45 0.45 6.95 6.95 21.2675 20.2 14.8 14.45 -0.55 6.95 6.95 21.2676 20.2 15.8 14.45 -1.55 6.95 6.95 21.2677 20.2 16.8 14.45 -2.55 6.95 6.95 21.2678 20.2 17.8 14.45 -3.55 6.95 6.95 21.2679 20.2 18.8 14.45 -4.55 6.95 6.95 21.2


680 20.2 19.8 14.45 -5.55 6.95 6.95 21.2681 20.2 20.8 14.45 -6.55 6.95 5.95 20.2682 20.2 21.8 14.45 -7.55 6.95 4.95 19.2683 20.2 22.8 14.45 -8.55 6.95 3.95 18.2684 20.2 23.8 14.45 -9.55 6.95 2.95 17.2685 20.2 24.8 14.45 -10.55 6.95 1.95 16.2686 20.2 25.8 14.45 -11.55 6.95 0.95 15.2687 20.2 26.8 14.45 -12.55 6.95 -0.05 14.2688 20.2 27.8 14.45 -13.55 6.95 -1.05 13.2689 20.2 28.8 14.45 -14.55 6.95 -2.05 12.2690 20.2 29.8 14.45 -15.55 6.95 -3.05 11.2691 20.2 30.8 14.45 -16.55 6.95 -4.05 10.2692 20.2 31.8 14.45 -17.55 6.95 -5.05 9.2693 20.2 32.8 14.45 -18.55 6.95 -6.05 8.2694 20.2 33.8 14.45 -19.55 6.95 -7.05 7.2695 20.2 34.8 14.45 -20.55 6.95 -8.05 6.2696 20.2 35.8 14.45 -21.55 6.95 -9.05 5.2697 20.2 36.8 14.45 -22.55 6.95 -10.05 4.2698 20.2 37.8 14.45 -23.55 6.95 -11.05 3.2699 20.2 38.8 14.45 -24.55 6.95 -12.05 2.2700 20.2 39.8 14.45 -25.55 6.95 -13.05 1.2701 20.2 40.8 14.45 -26.55 6.95 -14.05 0.2702 20.2 41.8 14.45 -27.55 6.95 -15.05 -0.8703 20.2 42.8 14.45 -28.55 6.95 -16.05 -1.8704 20.2 43.8 14.45 -29.55 6.95 -17.05 -2.8705 20.2 44.8 14.45 -30.55 6.95 -18.05 -3.8706 20.2 45.8 14.45 -31.55 6.95 -19.05 -4.8707 20.2 46.8 14.45 -32.55 6.95 -20.05 -5.8708 20.2 47.8 14.45 -33.55 6.95 -21.05 -6.8709 20.2 48.8 14.45 -34.55 6.95 -22.05 -7.8710 20.2 49.8 14.45 -35.55 6.95 -23.05 -8.8


(4) Ratio Spread

DESCRIPTION: - Long on 1 Call with low Strike Price & Short on 2 Calls at higher Strike Price

PAYOFF: At St < K1, There is Fixed Loss; i.e

Net Premium Paid At K2 ≥ St ≥ K1, Profit increases

linearly with St At St > K2, Loss increases Linearly

with Rise in Price

WHEN TO USE: - When the Trader expects the St to be in a range bound

Current Price of the Stock =So= 648Strike Price of Call Option=Kc1= 620Premium of Call Option=c1=Rs. 37.65Strike Price of Call Option=Kc2= 660Premium of Call Option=c2=Rs. 14.45


PAY-OFF TABLE

St

Premium for Kc1

Gain / Loss on

Kc1

Premium for Kc2

Gain / Loss on

Kc2Total

Gain/Loss

613 37.65 -37.65 28.9 28.9 -8.75614 37.65 -37.65 28.9 28.9 -8.75615 37.65 -37.65 28.9 28.9 -8.75616 37.65 -37.65 28.9 28.9 -8.75617 37.65 -37.65 28.9 28.9 -8.75618 37.65 -37.65 28.9 28.9 -8.75619 37.65 -37.65 28.9 28.9 -8.75620 37.65 -37.65 28.9 28.9 -8.75621 37.65 -36.65 28.9 28.9 -7.75622 37.65 -35.65 28.9 28.9 -6.75623 37.65 -34.65 28.9 28.9 -5.75624 37.65 -33.65 28.9 28.9 -4.75625 37.65 -32.65 28.9 28.9 -3.75626 37.65 -31.65 28.9 28.9 -2.75627 37.65 -30.65 28.9 28.9 -1.75628 37.65 -29.65 28.9 28.9 -0.75629 37.65 -28.65 28.9 28.9 0.25630 37.65 -27.65 28.9 28.9 1.25631 37.65 -26.65 28.9 28.9 2.25632 37.65 -25.65 28.9 28.9 3.25633 37.65 -24.65 28.9 28.9 4.25634 37.65 -23.65 28.9 28.9 5.25635 37.65 -22.65 28.9 28.9 6.25636 37.65 -21.65 28.9 28.9 7.25637 37.65 -20.65 28.9 28.9 8.25638 37.65 -19.65 28.9 28.9 9.25639 37.65 -18.65 28.9 28.9 10.25640 37.65 -17.65 28.9 28.9 11.25641 37.65 -16.65 28.9 28.9 12.25642 37.65 -15.65 28.9 28.9 13.25643 37.65 -14.65 28.9 28.9 14.25644 37.65 -13.65 28.9 28.9 15.25645 37.65 -12.65 28.9 28.9 16.25646 37.65 -11.65 28.9 28.9 17.25647 37.65 -10.65 28.9 28.9 18.25648 37.65 -9.65 28.9 28.9 19.25649 37.65 -8.65 28.9 28.9 20.25650 37.65 -7.65 28.9 28.9 21.25651 37.65 -6.65 28.9 28.9 22.25652 37.65 -5.65 28.9 28.9 23.25653 37.65 -4.65 28.9 28.9 24.25654 37.65 -3.65 28.9 28.9 25.25


655 37.65 -2.65 28.9 28.9 26.25656 37.65 -1.65 28.9 28.9 27.25657 37.65 -0.65 28.9 28.9 28.25658 37.65 0.35 28.9 28.9 29.25659 37.65 1.35 28.9 28.9 30.25660 37.65 2.35 28.9 28.9 31.25661 37.65 3.35 28.9 26.9 30.25662 37.65 4.35 28.9 24.9 29.25663 37.65 5.35 28.9 22.9 28.25664 37.65 6.35 28.9 20.9 27.25665 37.65 7.35 28.9 18.9 26.25666 37.65 8.35 28.9 16.9 25.25667 37.65 9.35 28.9 14.9 24.25668 37.65 10.35 28.9 12.9 23.25669 37.65 11.35 28.9 10.9 22.25670 37.65 12.35 28.9 8.9 21.25671 37.65 13.35 28.9 6.9 20.25672 37.65 14.35 28.9 4.9 19.25673 37.65 15.35 28.9 2.9 18.25674 37.65 16.35 28.9 0.9 17.25675 37.65 17.35 28.9 -1.1 16.25676 37.65 18.35 28.9 -3.1 15.25677 37.65 19.35 28.9 -5.1 14.25678 37.65 20.35 28.9 -7.1 13.25679 37.65 21.35 28.9 -9.1 12.25680 37.65 22.35 28.9 -11.1 11.25681 37.65 23.35 28.9 -13.1 10.25682 37.65 24.35 28.9 -15.1 9.25683 37.65 25.35 28.9 -17.1 8.25684 37.65 26.35 28.9 -19.1 7.25685 37.65 27.35 28.9 -21.1 6.25686 37.65 28.35 28.9 -23.1 5.25687 37.65 29.35 28.9 -25.1 4.25688 37.65 30.35 28.9 -27.1 3.25689 37.65 31.35 28.9 -29.1 2.25690 37.65 32.35 28.9 -31.1 1.25691 37.65 33.35 28.9 -33.1 0.25692 37.65 34.35 28.9 -35.1 -0.75693 37.65 35.35 28.9 -37.1 -1.75694 37.65 36.35 28.9 -39.1 -2.75695 37.65 37.35 28.9 -41.1 -3.75


TRADING STRATEGIES USED FOR VOLATILE OUTLOOK

(1) Long Guts

DESCRIPTION: - Long on Call at a low Strike Price & Long on Put at a high Strike Price

PAYOFF: At St < K1, Profit Reduces Linearly with Increase in Price At K2 > St > K1, Loss is Fixed; i.e Difference between (K1 & K2) and

Total Premium Paid At St > K3, Profit increases Linearly with Increase in Price

When to Use: - When the stock is too volatile

Market expectation: Market neutral/volatility bullish. The market is at, or about the A-B range and a large directional move in the underlying is anticipated. Position has characteristics comparable to an in-the-money strangle.


Profit: Unlimited in a rising or falling market. A substantial directional movement is required however.Loss: Limited to the initial premium paid less the difference between A and B; occurs if the underlying remains within the range A-B.

Break-even: Reached if the underlying rises above the higher strike price B by the amount equal to the cost of establishing the position less A-B, or if the underlying falls below the lower strike price A by the amount equal to the cost of establishing the position less A-B.

Current Price of the Stock =So= 648

Strike Price of Put Option =Kp= 680

Premium of Put Option =P= Rs. 36.5

Strike Price of Call Option=Kc= 620

Premium of Call Option =C= Rs. 37.65



Expiry Day ( St )

Premium Paid

( C )

Profit / Loss on

Call Position

Premium Put ( P )

Profit / Loss on

Put Position

Total Profit / Loss

595 37.65 -37.65 36.5 48.5 10.85596 37.65 -37.65 36.5 47.5 9.85597 37.65 -37.65 36.5 46.5 8.85598 37.65 -37.65 36.5 45.5 7.85599 37.65 -37.65 36.5 44.5 6.85600 37.65 -37.65 36.5 43.5 5.85601 37.65 -37.65 36.5 42.5 4.85602 37.65 -37.65 36.5 41.5 3.85603 37.65 -37.65 36.5 40.5 2.85604 37.65 -37.65 36.5 39.5 1.85605 37.65 -37.65 36.5 38.5 0.85606 37.65 -37.65 36.5 37.5 -0.15607 37.65 -37.65 36.5 36.5 -1.15608 37.65 -37.65 36.5 35.5 -2.15609 37.65 -37.65 36.5 34.5 -3.15610 37.65 -37.65 36.5 33.5 -4.15611 37.65 -37.65 36.5 32.5 -5.15612 37.65 -37.65 36.5 31.5 -6.15613 37.65 -37.65 36.5 30.5 -7.15614 37.65 -37.65 36.5 29.5 -8.15615 37.65 -37.65 36.5 28.5 -9.15616 37.65 -37.65 36.5 27.5 -10.15617 37.65 -37.65 36.5 26.5 -11.15618 37.65 -37.65 36.5 25.5 -12.15619 37.65 -37.65 36.5 24.5 -13.15620 37.65 -37.65 36.5 23.5 -14.15621 37.65 -36.65 36.5 22.5 -14.15622 37.65 -35.65 36.5 21.5 -14.15623 37.65 -34.65 36.5 20.5 -14.15624 37.65 -33.65 36.5 19.5 -14.15625 37.65 -32.65 36.5 18.5 -14.15626 37.65 -31.65 36.5 17.5 -14.15627 37.65 -30.65 36.5 16.5 -14.15628 37.65 -29.65 36.5 15.5 -14.15629 37.65 -28.65 36.5 14.5 -14.15630 37.65 -27.65 36.5 13.5 -14.15631 37.65 -26.65 36.5 12.5 -14.15632 37.65 -25.65 36.5 11.5 -14.15633 37.65 -24.65 36.5 10.5 -14.15634 37.65 -23.65 36.5 9.5 -14.15635 37.65 -22.65 36.5 8.5 -14.15636 37.65 -21.65 36.5 7.5 -14.15637 37.65 -20.65 36.5 6.5 -14.15638 37.65 -19.65 36.5 5.5 -14.15


639 37.65 -18.65 36.5 4.5 -14.15640 37.65 -17.65 36.5 3.5 -14.15641 37.65 -16.65 36.5 2.5 -14.15642 37.65 -15.65 36.5 1.5 -14.15643 37.65 -14.65 36.5 0.5 -14.15644 37.65 -13.65 36.5 -0.5 -14.15645 37.65 -12.65 36.5 -1.5 -14.15646 37.65 -11.65 36.5 -2.5 -14.15647 37.65 -10.65 36.5 -3.5 -14.15648 37.65 -9.65 36.5 -4.5 -14.15649 37.65 -8.65 36.5 -5.5 -14.15650 37.65 -7.65 36.5 -6.5 -14.15651 37.65 -6.65 36.5 -7.5 -14.15652 37.65 -5.65 36.5 -8.5 -14.15653 37.65 -4.65 36.5 -9.5 -14.15654 37.65 -3.65 36.5 -10.5 -14.15655 37.65 -2.65 36.5 -11.5 -14.15656 37.65 -1.65 36.5 -12.5 -14.15657 37.65 -0.65 36.5 -13.5 -14.15658 37.65 0.35 36.5 -14.5 -14.15659 37.65 1.35 36.5 -15.5 -14.15660 37.65 2.35 36.5 -16.5 -14.15661 37.65 3.35 36.5 -17.5 -14.15662 37.65 4.35 36.5 -18.5 -14.15663 37.65 5.35 36.5 -19.5 -14.15664 37.65 6.35 36.5 -20.5 -14.15665 37.65 7.35 36.5 -21.5 -14.15666 37.65 8.35 36.5 -22.5 -14.15667 37.65 9.35 36.5 -23.5 -14.15668 37.65 10.35 36.5 -24.5 -14.15669 37.65 11.35 36.5 -25.5 -14.15670 37.65 12.35 36.5 -26.5 -14.15671 37.65 13.35 36.5 -27.5 -14.15672 37.65 14.35 36.5 -28.5 -14.15673 37.65 15.35 36.5 -29.5 -14.15674 37.65 16.35 36.5 -30.5 -14.15675 37.65 17.35 36.5 -31.5 -14.15676 37.65 18.35 36.5 -32.5 -14.15677 37.65 19.35 36.5 -33.5 -14.15678 37.65 20.35 36.5 -34.5 -14.15679 37.65 21.35 36.5 -35.5 -14.15680 37.65 22.35 36.5 -36.5 -14.15681 37.65 23.35 36.5 -36.5 -13.15682 37.65 24.35 36.5 -36.5 -12.15683 37.65 25.35 36.5 -36.5 -11.15684 37.65 26.35 36.5 -36.5 -10.15685 37.65 27.35 36.5 -36.5 -9.15686 37.65 28.35 36.5 -36.5 -8.15687 37.65 29.35 36.5 -36.5 -7.15688 37.65 30.35 36.5 -36.5 -6.15


689 37.65 31.35 36.5 -36.5 -5.15690 37.65 32.35 36.5 -36.5 -4.15691 37.65 33.35 36.5 -36.5 -3.15692 37.65 34.35 36.5 -36.5 -2.15693 37.65 35.35 36.5 -36.5 -1.15694 37.65 36.35 36.5 -36.5 -0.15695 37.65 37.35 36.5 -36.5 0.85696 37.65 38.35 36.5 -36.5 1.85697 37.65 39.35 36.5 -36.5 2.85698 37.65 40.35 36.5 -36.5 3.85699 37.65 41.35 36.5 -36.5 4.85700 37.65 42.35 36.5 -36.5 5.85701 37.65 43.35 36.5 -36.5 6.85702 37.65 44.35 36.5 -36.5 7.85703 37.65 45.35 36.5 -36.5 8.85704 37.65 46.35 36.5 -36.5 9.85705 37.65 47.35 36.5 -36.5 10.85


(2) Short Condor

DESCRIPTION: - Short on Put at Low Strike Price K1, Long on Put at Higher Strike Price K2 & K3; & Short On Put at a very High Strike Price K4

PAYOFF: At St < K1, Profit is Fixed; i.e Net Premium

Received At K2 > St >K1,Profit Reduces linearly with

increase in Price At K3 > St > K2, Loss is Fixed At K4 > St > K3 , Profit Increases linearly with

increase in Price At St > K4, Profit is Fixed ; i.e Net Premium

Received

When to Use: - When the stock is too Volatile

Market Expectation: Direction neutral/volatility bullish. Holder expects the market to move significantly, or volatility to rise, but the direction is uncertain. A Short Condor will require a larger directional move than a butterfly in order to yield a profit.


Profit: Limited and will occur if the market moves above the highest strike (D) or below the lower strike at A.

Loss: Maximum losses are limited and will occur if the market remains between the exercise prices B and C.

Break-even: Lower break even reached when underlying reaches the lower strike price A plus the net credit received from establishing the position, and the higher breakeven when the underlying reaches the level of the higher strike price D minus the credit received from establishing the position.

Current Price of the Stock =So= 648Strike Price of Put Option=K1= 600Premium of Put Option =K1= Rs. 4.95Strike Price of Put Option=K2= 620Premium of Put Option =K2= Rs. 7.85Strike Price of Put Option=K3= 640Premium of Put Option =K3= Rs. 11.9Strike Price of Put Option=K3= 660Premium of Put Option =K3= Rs. 24.2


PAY-OFF TABLE

StPremium

for K1

Gain / Loss on

K1Premium

for K2Gain / Loss

on K2Premium

for K3Gain / Loss

on K3Premium

for K4Gain /

Loss on K4Total

Gain/Loss

595 4.95 -0.05 7.85 17.15 11.9 33.1 24.2 -40.8 9.4

596 4.95 0.95 7.85 16.15 11.9 32.1 24.2 -39.8 9.4

597 4.95 1.95 7.85 15.15 11.9 31.1 24.2 -38.8 9.4

598 4.95 2.95 7.85 14.15 11.9 30.1 24.2 -37.8 9.4

599 4.95 3.95 7.85 13.15 11.9 29.1 24.2 -36.8 9.4

600 4.95 4.95 7.85 12.15 11.9 28.1 24.2 -35.8 9.4

601 4.95 4.95 7.85 11.15 11.9 27.1 24.2 -34.8 8.4

602 4.95 4.95 7.85 10.15 11.9 26.1 24.2 -33.8 7.4

603 4.95 4.95 7.85 9.15 11.9 25.1 24.2 -32.8 6.4

604 4.95 4.95 7.85 8.15 11.9 24.1 24.2 -31.8 5.4

605 4.95 4.95 7.85 7.15 11.9 23.1 24.2 -30.8 4.4

606 4.95 4.95 7.85 6.15 11.9 22.1 24.2 -29.8 3.4

607 4.95 4.95 7.85 5.15 11.9 21.1 24.2 -28.8 2.4

608 4.95 4.95 7.85 4.15 11.9 20.1 24.2 -27.8 1.4

609 4.95 4.95 7.85 3.15 11.9 19.1 24.2 -26.8 0.4

610 4.95 4.95 7.85 2.15 11.9 18.1 24.2 -25.8 -0.6

611 4.95 4.95 7.85 1.15 11.9 17.1 24.2 -24.8 -1.6

612 4.95 4.95 7.85 0.15 11.9 16.1 24.2 -23.8 -2.6

613 4.95 4.95 7.85 -0.85 11.9 15.1 24.2 -22.8 -3.6

614 4.95 4.95 7.85 -1.85 11.9 14.1 24.2 -21.8 -4.6

615 4.95 4.95 7.85 -2.85 11.9 13.1 24.2 -20.8 -5.6

616 4.95 4.95 7.85 -3.85 11.9 12.1 24.2 -19.8 -6.6

617 4.95 4.95 7.85 -4.85 11.9 11.1 24.2 -18.8 -7.6

618 4.95 4.95 7.85 -5.85 11.9 10.1 24.2 -17.8 -8.6

619 4.95 4.95 7.85 -6.85 11.9 9.1 24.2 -16.8 -9.6

620 4.95 4.95 7.85 -7.85 11.9 8.1 24.2 -15.8 -10.6

621 4.95 4.95 7.85 -7.85 11.9 7.1 24.2 -14.8 -10.6

622 4.95 4.95 7.85 -7.85 11.9 6.1 24.2 -13.8 -10.6

623 4.95 4.95 7.85 -7.85 11.9 5.1 24.2 -12.8 -10.6

624 4.95 4.95 7.85 -7.85 11.9 4.1 24.2 -11.8 -10.6

625 4.95 4.95 7.85 -7.85 11.9 3.1 24.2 -10.8 -10.6

626 4.95 4.95 7.85 -7.85 11.9 2.1 24.2 -9.8 -10.6

627 4.95 4.95 7.85 -7.85 11.9 1.1 24.2 -8.8 -10.6

628 4.95 4.95 7.85 -7.85 11.9 0.1 24.2 -7.8 -10.6

629 4.95 4.95 7.85 -7.85 11.9 -0.9 24.2 -6.8 -10.6

630 4.95 4.95 7.85 -7.85 11.9 -1.9 24.2 -5.8 -10.6

631 4.95 4.95 7.85 -7.85 11.9 -2.9 24.2 -4.8 -10.6

632 4.95 4.95 7.85 -7.85 11.9 -3.9 24.2 -3.8 -10.6

633 4.95 4.95 7.85 -7.85 11.9 -4.9 24.2 -2.8 -10.6

634 4.95 4.95 7.85 -7.85 11.9 -5.9 24.2 -1.8 -10.6

635 4.95 4.95 7.85 -7.85 11.9 -6.9 24.2 -0.8 -10.6

636 4.95 4.95 7.85 -7.85 11.9 -7.9 24.2 0.2 -10.6

637 4.95 4.95 7.85 -7.85 11.9 -8.9 24.2 1.2 -10.6


638 4.95 4.95 7.85 -7.85 11.9 -9.9 24.2 2.2 -10.6

639 4.95 4.95 7.85 -7.85 11.9 -10.9 24.2 3.2 -10.6

640 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 4.2 -10.6

641 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 5.2 -9.6

642 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 6.2 -8.6

643 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 7.2 -7.6

644 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 8.2 -6.6

645 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 9.2 -5.6

646 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 10.2 -4.6

647 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 11.2 -3.6

648 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 12.2 -2.6

649 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 13.2 -1.6

650 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 14.2 -0.6

651 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 15.2 0.4

652 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 16.2 1.4

653 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 17.2 2.4

654 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 18.2 3.4

655 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 19.2 4.4

656 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 20.2 5.4

657 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 21.2 6.4

658 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 22.2 7.4

659 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 23.2 8.4

660 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 24.2 9.4

661 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 24.2 9.4

662 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 24.2 9.4

663 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 24.2 9.4

664 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 24.2 9.4

665 4.95 4.95 7.85 -7.85 11.9 -11.9 24.2 24.2 9.4


(3) Butterfly Spread

DESCRIPTION: - Long on 1 Call at low Strike Price K1, Short on 2 Calls at higher Strike Price K2 & Long 1 Call at Higher Strike Price K3

PAYOFF: St ≤ Kc1, there is fixed profit of net premium

Received At Kc2 ≥ St ≥ Kc1, Profit increases Linearly with

rise in St At Kc2, there is Maximum Profit ;i.e Net premium

received + K2 - K1 At Kc3 ≥ St ≥ Kc2, Profit reduces linearly with

rise in St At St > Kc3, there is fixed profit of net premium

Received

WHEN TO USE: - A Trader feels that the stock is too volatileMarket expectation: Direction neutral/volatility bearish. In this case, the holder expects the underlying to remain around strike B, or it is felt that there will be a fall in implied volatility.Position is less risky than selling straddles or strangles as there is a limited downside exposure.


Profit: Maximum profit limited to the difference in strikes between A and B minus the net cost of establishing the position. Maximized at mid strike B (assuming A-B and B-C are equal).Loss: Maximum loss limited to the net cost of the position for either a rise or a fall in the underlying.Break-even: Reached when the underlying is higher than A or lower than C by the cost of establishing the position.

Current Price of the Stock =So= 648Strike Price of Call Option=Kc1= 640Premium of Call Option =K1= Rs. 20.2Strike Price of Call Option=Kc2= 660Premium of Call Option =K2= Rs. 14.45Strike Price of Call Option=Kc3= 680Premium of Call Option =Kc3= Rs. 6.95


PAY-OFF TABLE

St

Premium for Kc1

Gain / Loss on

Kc1

Premium for Kc2

Gain / Loss on

Kc2

Premium for Kc3

Gain / Loss on

Kc3Total

Gain/Loss

630 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75631 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75632 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75633 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75634 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75635 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75636 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75637 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75638 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75639 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75640 20.2 -20.2 28.9 28.9 6.95 -6.95 1.75641 20.2 -19.2 28.9 28.9 6.95 -6.95 2.75642 20.2 -18.2 28.9 28.9 6.95 -6.95 3.75643 20.2 -17.2 28.9 28.9 6.95 -6.95 4.75644 20.2 -16.2 28.9 28.9 6.95 -6.95 5.75645 20.2 -15.2 28.9 28.9 6.95 -6.95 6.75646 20.2 -14.2 28.9 28.9 6.95 -6.95 7.75647 20.2 -13.2 28.9 28.9 6.95 -6.95 8.75648 20.2 -12.2 28.9 28.9 6.95 -6.95 9.75649 20.2 -11.2 28.9 28.9 6.95 -6.95 10.75650 20.2 -10.2 28.9 28.9 6.95 -6.95 11.75651 20.2 -9.2 28.9 28.9 6.95 -6.95 12.75652 20.2 -8.2 28.9 28.9 6.95 -6.95 13.75653 20.2 -7.2 28.9 28.9 6.95 -6.95 14.75654 20.2 -6.2 28.9 28.9 6.95 -6.95 15.75655 20.2 -5.2 28.9 28.9 6.95 -6.95 16.75656 20.2 -4.2 28.9 28.9 6.95 -6.95 17.75657 20.2 -3.2 28.9 28.9 6.95 -6.95 18.75658 20.2 -2.2 28.9 28.9 6.95 -6.95 19.75659 20.2 -1.2 28.9 28.9 6.95 -6.95 20.75660 20.2 -0.2 28.9 28.9 6.95 -6.95 21.75661 20.2 0.8 28.9 26.9 6.95 -6.95 20.75662 20.2 1.8 28.9 24.9 6.95 -6.95 19.75663 20.2 2.8 28.9 22.9 6.95 -6.95 18.75664 20.2 3.8 28.9 20.9 6.95 -6.95 17.75665 20.2 4.8 28.9 18.9 6.95 -6.95 16.75666 20.2 5.8 28.9 16.9 6.95 -6.95 15.75667 20.2 6.8 28.9 14.9 6.95 -6.95 14.75668 20.2 7.8 28.9 12.9 6.95 -6.95 13.75669 20.2 8.8 28.9 10.9 6.95 -6.95 12.75670 20.2 9.8 28.9 8.9 6.95 -6.95 11.75671 20.2 10.8 28.9 6.9 6.95 -6.95 10.75672 20.2 11.8 28.9 4.9 6.95 -6.95 9.75673 20.2 12.8 28.9 2.9 6.95 -6.95 8.75


674 20.2 13.8 28.9 0.9 6.95 -6.95 7.75675 20.2 14.8 28.9 -1.1 6.95 -6.95 6.75676 20.2 15.8 28.9 -3.1 6.95 -6.95 5.75677 20.2 16.8 28.9 -5.1 6.95 -6.95 4.75678 20.2 17.8 28.9 -7.1 6.95 -6.95 3.75679 20.2 18.8 28.9 -9.1 6.95 -6.95 2.75680 20.2 19.8 28.9 -11.1 6.95 -6.95 1.75681 20.2 20.8 28.9 -13.1 6.95 -5.95 1.75682 20.2 21.8 28.9 -15.1 6.95 -4.95 1.75683 20.2 22.8 28.9 -17.1 6.95 -3.95 1.75684 20.2 23.8 28.9 -19.1 6.95 -2.95 1.75685 20.2 24.8 28.9 -21.1 6.95 -1.95 1.75686 20.2 25.8 28.9 -23.1 6.95 -0.95 1.75687 20.2 26.8 28.9 -25.1 6.95 0.05 1.75688 20.2 27.8 28.9 -27.1 6.95 1.05 1.75689 20.2 28.8 28.9 -29.1 6.95 2.05 1.75690 20.2 29.8 28.9 -31.1 6.95 3.05 1.75691 20.2 30.8 28.9 -33.1 6.95 4.05 1.75692 20.2 31.8 28.9 -35.1 6.95 5.05 1.75693 20.2 32.8 28.9 -37.1 6.95 6.05 1.75694 20.2 33.8 28.9 -39.1 6.95 7.05 1.75695 20.2 34.8 28.9 -41.1 6.95 8.05 1.75


(4) Long straddle

DESCRIPTION: - Long on 1 Call & 1 Put at the same strike price

PAYOFF: At St =(K - total Premium paid) & At St = (K + total

premium paid), there is no profit & no Loss At St ≤ (K - total Premium paid), Profit keeps on

decreasing with rise in St At K ≥ St ≥ (K - total Premium paid), Loss keeps on

increasing with rise in St At St = K , There is maximum loss ; i.e total premium

paid At K ≥ St ≥ (K + total Premium paid), Loss keeps on

reducing with rise in St At St > (K + total Premium paid), Profit keeps on

increasing with rise in St

Risk: Limited, but should not really be viewed as a low risk strategy because you are paying out for two options which are both wasting assets

Reward: Unlimited

WHEN TO USE: You believe that the stock/index is about to make a large move in either direction. A good time to utilize straddles is where there has been a prolonged period of extreme quietness (in prices) and implied volatility is around multiyear lows. If this is the case look to do longer dated months rather than the shorter onesVOLATILITY EXPECTATION: Very bullish. Volatility increases improve the position substantially. Volatility should therefore be monitored closely.

PROFIT: Unlimited for an increase or decrease in the underlying

LOSS: Limited to the premium paid in establishing the position. Loss will be greatest if the underlying is at the initiated strike at expiry.

BREAKEVEN: Reached if the underlying rises or falls from option strikes by the same amount as the premium cost of establishing the position.

TIME DECAY: Hurts a lot, remember you have double time erosion because of the two options bought. Decay depends a lot on volatility if volatility increases time decay will decrease etc.

Current Price of the Stock =So= 648Strike Price of Call Option=Kc= 660Premium of Call Option =Kc= Rs. 14.45Strike Price of Put Option=Kp= 660Premium of Call Option =Kp= Rs. 24.25


PAY-OFF TABLE

StPremiu

m for Kc

Gain / Loss on

KcPremiu

m for Kp

Gain / Loss on

KpTotal

Gain/Loss

610 14.45 -14.45 24.25 25.75 11.3611 14.45 -14.45 24.25 24.75 10.3612 14.45 -14.45 24.25 23.75 9.3613 14.45 -14.45 24.25 22.75 8.3614 14.45 -14.45 24.25 21.75 7.3615 14.45 -14.45 24.25 20.75 6.3616 14.45 -14.45 24.25 19.75 5.3617 14.45 -14.45 24.25 18.75 4.3618 14.45 -14.45 24.25 17.75 3.3619 14.45 -14.45 24.25 16.75 2.3620 14.45 -14.45 24.25 15.75 1.3621 14.45 -14.45 24.25 14.75 0.3622 14.45 -14.45 24.25 13.75 -0.7623 14.45 -14.45 24.25 12.75 -1.7624 14.45 -14.45 24.25 11.75 -2.7625 14.45 -14.45 24.25 10.75 -3.7626 14.45 -14.45 24.25 9.75 -4.7627 14.45 -14.45 24.25 8.75 -5.7628 14.45 -14.45 24.25 7.75 -6.7629 14.45 -14.45 24.25 6.75 -7.7630 14.45 -14.45 24.25 5.75 -8.7631 14.45 -14.45 24.25 4.75 -9.7632 14.45 -14.45 24.25 3.75 -10.7633 14.45 -14.45 24.25 2.75 -11.7634 14.45 -14.45 24.25 1.75 -12.7635 14.45 -14.45 24.25 0.75 -13.7636 14.45 -14.45 24.25 -0.25 -14.7637 14.45 -14.45 24.25 -1.25 -15.7638 14.45 -14.45 24.25 -2.25 -16.7639 14.45 -14.45 24.25 -3.25 -17.7640 14.45 -14.45 24.25 -4.25 -18.7641 14.45 -14.45 24.25 -5.25 -19.7642 14.45 -14.45 24.25 -6.25 -20.7643 14.45 -14.45 24.25 -7.25 -21.7644 14.45 -14.45 24.25 -8.25 -22.7645 14.45 -14.45 24.25 -9.25 -23.7646 14.45 -14.45 24.25 -10.25 -24.7647 14.45 -14.45 24.25 -11.25 -25.7648 14.45 -14.45 24.25 -12.25 -26.7649 14.45 -14.45 24.25 -13.25 -27.7650 14.45 -14.45 24.25 -14.25 -28.7651 14.45 -14.45 24.25 -15.25 -29.7652 14.45 -14.45 24.25 -16.25 -30.7


653 14.45 -14.45 24.25 -17.25 -31.7654 14.45 -14.45 24.25 -18.25 -32.7655 14.45 -14.45 24.25 -19.25 -33.7656 14.45 -14.45 24.25 -20.25 -34.7657 14.45 -14.45 24.25 -21.25 -35.7658 14.45 -14.45 24.25 -22.25 -36.7659 14.45 -14.45 24.25 -23.25 -37.7660 14.45 -14.45 24.25 -24.25 -38.7661 14.45 -13.45 24.25 -24.25 -37.7662 14.45 -12.45 24.25 -24.25 -36.7663 14.45 -11.45 24.25 -24.25 -35.7664 14.45 -10.45 24.25 -24.25 -34.7665 14.45 -9.45 24.25 -24.25 -33.7666 14.45 -8.45 24.25 -24.25 -32.7667 14.45 -7.45 24.25 -24.25 -31.7668 14.45 -6.45 24.25 -24.25 -30.7669 14.45 -5.45 24.25 -24.25 -29.7670 14.45 -4.45 24.25 -24.25 -28.7671 14.45 -3.45 24.25 -24.25 -27.7672 14.45 -2.45 24.25 -24.25 -26.7673 14.45 -1.45 24.25 -24.25 -25.7674 14.45 -0.45 24.25 -24.25 -24.7675 14.45 0.55 24.25 -24.25 -23.7676 14.45 1.55 24.25 -24.25 -22.7677 14.45 2.55 24.25 -24.25 -21.7678 14.45 3.55 24.25 -24.25 -20.7679 14.45 4.55 24.25 -24.25 -19.7680 14.45 5.55 24.25 -24.25 -18.7681 14.45 6.55 24.25 -24.25 -17.7682 14.45 7.55 24.25 -24.25 -16.7683 14.45 8.55 24.25 -24.25 -15.7684 14.45 9.55 24.25 -24.25 -14.7685 14.45 10.55 24.25 -24.25 -13.7686 14.45 11.55 24.25 -24.25 -12.7687 14.45 12.55 24.25 -24.25 -11.7688 14.45 13.55 24.25 -24.25 -10.7689 14.45 14.55 24.25 -24.25 -9.7690 14.45 15.55 24.25 -24.25 -8.7691 14.45 16.55 24.25 -24.25 -7.7692 14.45 17.55 24.25 -24.25 -6.7693 14.45 18.55 24.25 -24.25 -5.7694 14.45 19.55 24.25 -24.25 -4.7695 14.45 20.55 24.25 -24.25 -3.7696 14.45 21.55 24.25 -24.25 -2.7697 14.45 22.55 24.25 -24.25 -1.7698 14.45 23.55 24.25 -24.25 -0.7699 14.45 24.55 24.25 -24.25 0.3700 14.45 25.55 24.25 -24.25 1.3701 14.45 26.55 24.25 -24.25 2.3702 14.45 27.55 24.25 -24.25 3.3


703 14.45 28.55 24.25 -24.25 4.3704 14.45 29.55 24.25 -24.25 5.3705 14.45 30.55 24.25 -24.25 6.3706 14.45 31.55 24.25 -24.25 7.3707 14.45 32.55 24.25 -24.25 8.3708 14.45 33.55 24.25 -24.25 9.3709 14.45 34.55 24.25 -24.25 10.3710 14.45 35.55 24.25 -24.25 11.3


(5) Long strangle

DESCRIPTION: - Long on 1 Call at a high Strike Price K2 & 1 Put at the Lower strike price K1

PAYOFF: At St =(K1 - total Premium paid) & At St = (K2 + total

premium paid), there is no profit & no Loss At St ≤ (K1 - total Premium paid), Profit keeps on

decreasing with rise in St At K1 ≥ St ≥ (K1 - total Premium paid), Loss keeps on

increasing with rise in St At K2 ≥ St ≥ K1 , Thereis fixed loss ; i.e total premium paid At K2 ≥ St ≥ (K2 + total Premium paid), Loss keeps on

reducing with rise in St At St > (K2 + total Premium paid), Profit keeps on

increasing with rise in St

Risk: Limited

Reward: Unlimited

The Trade: Buying out-of-the-money calls and puts

WHEN TO USE: You believe the stock/index will have an explosive move either up or down. This strategy is similar to the buy straddle but the premium paid is less but then a larger move is needed to show a profit.VOLATILITY EXPECTATION: Very bullish, increases in volatility work marvels for the position

PROFIT: The profit potential is unlimited although a substantial directional movement is necessary to yield a profit for both a rise and fall in the underlying.

LOSS: Occurs if the market is static; limited to the premium paid in establishing the position

BREAKEVEN: Occurs if the market rises above the higher strike price at B by an amount equal to the cost of establishing the position or if the market falls below the lower strike price at A by the amount equal to the cost of establishing the position., TIME DECAY: This position is a big wasting asset. As time passes, value of position erodes toward expiration value. If volatility increases, erosion slows, if volatility decreases, erosion speeds up.

Current Price of the Stock =So= 648Strike Price of Call Option=Kc= 660Premium of Call Option =Kc= Rs. 14.45Strike Price of Put Option=Kp= 640Premium of Call Option =Kp= Rs. 11.9

PAY-OFF TABLE


StPremiu

m for Kc

Gain / Loss on

KcPremiu

m for Kp

Gain / Loss on

KpTotal

Gain/Loss


600 14.45 -14.45 11.9 28.1 13.65601 14.45 -14.45 11.9 27.1 12.65602 14.45 -14.45 11.9 26.1 11.65603 14.45 -14.45 11.9 25.1 10.65604 14.45 -14.45 11.9 24.1 9.65605 14.45 -14.45 11.9 23.1 8.65606 14.45 -14.45 11.9 22.1 7.65607 14.45 -14.45 11.9 21.1 6.65608 14.45 -14.45 11.9 20.1 5.65609 14.45 -14.45 11.9 19.1 4.65610 14.45 -14.45 11.9 18.1 3.65611 14.45 -14.45 11.9 17.1 2.65612 14.45 -14.45 11.9 16.1 1.65613 14.45 -14.45 11.9 15.1 0.65614 14.45 -14.45 11.9 14.1 -0.35615 14.45 -14.45 11.9 13.1 -1.35616 14.45 -14.45 11.9 12.1 -2.35617 14.45 -14.45 11.9 11.1 -3.35618 14.45 -14.45 11.9 10.1 -4.35619 14.45 -14.45 11.9 9.1 -5.35620 14.45 -14.45 11.9 8.1 -6.35621 14.45 -14.45 11.9 7.1 -7.35622 14.45 -14.45 11.9 6.1 -8.35623 14.45 -14.45 11.9 5.1 -9.35624 14.45 -14.45 11.9 4.1 -10.35625 14.45 -14.45 11.9 3.1 -11.35626 14.45 -14.45 11.9 2.1 -12.35627 14.45 -14.45 11.9 1.1 -13.35628 14.45 -14.45 11.9 0.1 -14.35629 14.45 -14.45 11.9 -0.9 -15.35630 14.45 -14.45 11.9 -1.9 -16.35631 14.45 -14.45 11.9 -2.9 -17.35632 14.45 -14.45 11.9 -3.9 -18.35633 14.45 -14.45 11.9 -4.9 -19.35634 14.45 -14.45 11.9 -5.9 -20.35635 14.45 -14.45 11.9 -6.9 -21.35636 14.45 -14.45 11.9 -7.9 -22.35637 14.45 -14.45 11.9 -8.9 -23.35638 14.45 -14.45 11.9 -9.9 -24.35639 14.45 -14.45 11.9 -10.9 -25.35640 14.45 -14.45 11.9 -11.9 -26.35641 14.45 -14.45 11.9 -11.9 -26.35642 14.45 -14.45 11.9 -11.9 -26.35643 14.45 -14.45 11.9 -11.9 -26.35644 14.45 -14.45 11.9 -11.9 -26.35645 14.45 -14.45 11.9 -11.9 -26.35646 14.45 -14.45 11.9 -11.9 -26.35647 14.45 -14.45 11.9 -11.9 -26.35648 14.45 -14.45 11.9 -11.9 -26.35


649 14.45 -14.45 11.9 -11.9 -26.35650 14.45 -14.45 11.9 -11.9 -26.35651 14.45 -14.45 11.9 -11.9 -26.35652 14.45 -14.45 11.9 -11.9 -26.35653 14.45 -14.45 11.9 -11.9 -26.35654 14.45 -14.45 11.9 -11.9 -26.35655 14.45 -14.45 11.9 -11.9 -26.35656 14.45 -14.45 11.9 -11.9 -26.35657 14.45 -14.45 11.9 -11.9 -26.35658 14.45 -14.45 11.9 -11.9 -26.35659 14.45 -14.45 11.9 -11.9 -26.35660 14.45 -14.45 11.9 -11.9 -26.35661 14.45 -13.45 11.9 -11.9 -25.35662 14.45 -12.45 11.9 -11.9 -24.35663 14.45 -11.45 11.9 -11.9 -23.35664 14.45 -10.45 11.9 -11.9 -22.35665 14.45 -9.45 11.9 -11.9 -21.35666 14.45 -8.45 11.9 -11.9 -20.35667 14.45 -7.45 11.9 -11.9 -19.35668 14.45 -6.45 11.9 -11.9 -18.35669 14.45 -5.45 11.9 -11.9 -17.35670 14.45 -4.45 11.9 -11.9 -16.35671 14.45 -3.45 11.9 -11.9 -15.35672 14.45 -2.45 11.9 -11.9 -14.35673 14.45 -1.45 11.9 -11.9 -13.35674 14.45 -0.45 11.9 -11.9 -12.35675 14.45 0.55 11.9 -11.9 -11.35676 14.45 1.55 11.9 -11.9 -10.35677 14.45 2.55 11.9 -11.9 -9.35678 14.45 3.55 11.9 -11.9 -8.35679 14.45 4.55 11.9 -11.9 -7.35680 14.45 5.55 11.9 -11.9 -6.35681 14.45 6.55 11.9 -11.9 -5.35682 14.45 7.55 11.9 -11.9 -4.35683 14.45 8.55 11.9 -11.9 -3.35684 14.45 9.55 11.9 -11.9 -2.35685 14.45 10.55 11.9 -11.9 -1.35686 14.45 11.55 11.9 -11.9 -0.35687 14.45 12.55 11.9 -11.9 0.65688 14.45 13.55 11.9 -11.9 1.65689 14.45 14.55 11.9 -11.9 2.65690 14.45 15.55 11.9 -11.9 3.65691 14.45 16.55 11.9 -11.9 4.65692 14.45 17.55 11.9 -11.9 5.65693 14.45 18.55 11.9 -11.9 6.65694 14.45 19.55 11.9 -11.9 7.65695 14.45 20.55 11.9 -11.9 8.65696 14.45 21.55 11.9 -11.9 9.65697 14.45 22.55 11.9 -11.9 10.65698 14.45 23.55 11.9 -11.9 11.65


699 14.45 24.55 11.9 -11.9 12.65700 14.45 25.55 11.9 -11.9 13.65


TRADING STRATEGIES USED FOR OPPORTUNISTIC OUTLOOK

1) Conversion

DESCRIPTION: - Long on Underlying, Long on Put & short on Call at the same Strike Price

PAYOFF: At any St, there is Fixed Profit WHEN TO USE: - Trader is Risk Averse



Premium of Call Option=c=Rs. 14.45

Strike Price of Put Option=Kp= 660

Premium of Put Option=P=Rs. 24.25


PAY-OFF TABLEPrice of Stock on Expiry

Day ( St )


(St - So)

Premium Paid

( P )

Profit / Loss on

Put Position


Profit / Loss on

Call Position

Total Profit / Loss

640 -8 24.25 -4.25 14.45 14.45 2.2641 -7 24.25 -5.25 14.45 14.45 2.2642 -6 24.25 -6.25 14.45 14.45 2.2643 -5 24.25 -7.25 14.45 14.45 2.2644 -4 24.25 -8.25 14.45 14.45 2.2645 -3 24.25 -9.25 14.45 14.45 2.2646 -2 24.25 -10.25 14.45 14.45 2.2647 -1 24.25 -11.25 14.45 14.45 2.2648 0 24.25 -12.25 14.45 14.45 2.2649 1 24.25 -13.25 14.45 14.45 2.2650 2 24.25 -14.25 14.45 14.45 2.2651 3 24.25 -15.25 14.45 14.45 2.2652 4 24.25 -16.25 14.45 14.45 2.2653 5 24.25 -17.25 14.45 14.45 2.2654 6 24.25 -18.25 14.45 14.45 2.2655 7 24.25 -19.25 14.45 14.45 2.2656 8 24.25 -20.25 14.45 14.45 2.2657 9 24.25 -21.25 14.45 14.45 2.2658 10 24.25 -22.25 14.45 14.45 2.2659 11 24.25 -23.25 14.45 14.45 2.2660 12 24.25 -24.25 14.45 14.45 2.2661 13 24.25 -24.25 14.45 13.45 2.2662 14 24.25 -24.25 14.45 12.45 2.2663 15 24.25 -24.25 14.45 11.45 2.2664 16 24.25 -24.25 14.45 10.45 2.2665 17 24.25 -24.25 14.45 9.45 2.2666 18 24.25 -24.25 14.45 8.45 2.2667 19 24.25 -24.25 14.45 7.45 2.2668 20 24.25 -24.25 14.45 6.45 2.2669 21 24.25 -24.25 14.45 5.45 2.2670 22 24.25 -24.25 14.45 4.45 2.2671 23 24.25 -24.25 14.45 3.45 2.2672 24 24.25 -24.25 14.45 2.45 2.2673 25 24.25 -24.25 14.45 1.45 2.2674 26 24.25 -24.25 14.45 0.45 2.2675 27 24.25 -24.25 14.45 -0.55 2.2676 28 24.25 -24.25 14.45 -1.55 2.2677 29 24.25 -24.25 14.45 -2.55 2.2678 30 24.25 -24.25 14.45 -3.55 2.2679 31 24.25 -24.25 14.45 -4.55 2.2680 32 24.25 -24.25 14.45 -5.55 2.2681 33 24.25 -24.25 14.45 -6.55 2.2


682 34 24.25 -24.25 14.45 -7.55 2.2683 35 24.25 -24.25 14.45 -8.55 2.2684 36 24.25 -24.25 14.45 -9.55 2.2685 37 24.25 -24.25 14.45 -10.55 2.2


(2) Reversal

DESCRIPTION: - Short on Underlying, Short on Put & Long on Call at the same Strike Price

PAYOFF: At any St, there is Fixed Profit WHEN TO USE: - Trader is Risk Averse



Premium of Call Option=c=Rs. 14.45

Strike Price of Put Option=Kp= 660

Premium of Put Option=P=Rs. 24.25



Expiry Day St


(So - St)

Premium Received (

P )

Profit / Loss on

Put Position

Premium Paid

( C )

Profit / Loss on

Call Position

Total Profit / Loss

625 30 24.25 -10.75 14.45 -14.45 4.8626 29 24.25 -9.75 14.45 -14.45 4.8627 28 24.25 -8.75 14.45 -14.45 4.8628 27 24.25 -7.75 14.45 -14.45 4.8629 26 24.25 -6.75 14.45 -14.45 4.8630 25 24.25 -5.75 14.45 -14.45 4.8631 24 24.25 -4.75 14.45 -14.45 4.8632 23 24.25 -3.75 14.45 -14.45 4.8633 22 24.25 -2.75 14.45 -14.45 4.8634 21 24.25 -1.75 14.45 -14.45 4.8635 20 24.25 -0.75 14.45 -14.45 4.8636 19 24.25 0.25 14.45 -14.45 4.8637 18 24.25 1.25 14.45 -14.45 4.8638 17 24.25 2.25 14.45 -14.45 4.8639 16 24.25 3.25 14.45 -14.45 4.8640 15 24.25 4.25 14.45 -14.45 4.8641 14 24.25 5.25 14.45 -14.45 4.8642 13 24.25 6.25 14.45 -14.45 4.8643 12 24.25 7.25 14.45 -14.45 4.8644 11 24.25 8.25 14.45 -14.45 4.8645 10 24.25 9.25 14.45 -14.45 4.8646 9 24.25 10.25 14.45 -14.45 4.8647 8 24.25 11.25 14.45 -14.45 4.8648 7 24.25 12.25 14.45 -14.45 4.8649 6 24.25 13.25 14.45 -14.45 4.8650 5 24.25 14.25 14.45 -14.45 4.8651 4 24.25 15.25 14.45 -14.45 4.8652 3 24.25 16.25 14.45 -14.45 4.8653 2 24.25 17.25 14.45 -14.45 4.8654 1 24.25 18.25 14.45 -14.45 4.8655 0 24.25 19.25 14.45 -14.45 4.8656 -1 24.25 20.25 14.45 -14.45 4.8657 -2 24.25 21.25 14.45 -14.45 4.8658 -3 24.25 22.25 14.45 -14.45 4.8659 -4 24.25 23.25 14.45 -14.45 4.8660 -5 24.25 24.25 14.45 -14.45 4.8661 -6 24.25 24.25 14.45 -13.45 4.8662 -7 24.25 24.25 14.45 -12.45 4.8663 -8 24.25 24.25 14.45 -11.45 4.8664 -9 24.25 24.25 14.45 -10.45 4.8665 -10 24.25 24.25 14.45 -9.45 4.8666 -11 24.25 24.25 14.45 -8.45 4.8667 -12 24.25 24.25 14.45 -7.45 4.8668 -13 24.25 24.25 14.45 -6.45 4.8


669 -14 24.25 24.25 14.45 -5.45 4.8670 -15 24.25 24.25 14.45 -4.45 4.8671 -16 24.25 24.25 14.45 -3.45 4.8672 -17 24.25 24.25 14.45 -2.45 4.8673 -18 24.25 24.25 14.45 -1.45 4.8674 -19 24.25 24.25 14.45 -0.45 4.8675 -20 24.25 24.25 14.45 0.55 4.8676 -21 24.25 24.25 14.45 1.55 4.8677 -22 24.25 24.25 14.45 2.55 4.8678 -23 24.25 24.25 14.45 3.55 4.8679 -24 24.25 24.25 14.45 4.55 4.8680 -25 24.25 24.25 14.45 5.55 4.8681 -26 24.25 24.25 14.45 6.55 4.8682 -27 24.25 24.25 14.45 7.55 4.8683 -28 24.25 24.25 14.45 8.55 4.8684 -29 24.25 24.25 14.45 9.55 4.8685 -30 24.25 24.25 14.45 10.55 4.8


(3) Long Box

DESCRIPTION: - Long on Call & Short on Put at a low Strike Price K1, & Long on Put & short on Call at a High Strike Price K2

PAYOFF: At any St, There is fixed profit of Net Premium ReceivedWhen to Use: - When u have a Bearish Outlook

Market expectation: Direction neutral/volatility neutral. This is a 'locked trade', and hence its value is wholly independent of the price of the underlying. Where the synthetic long underlying price at one strike is trading at a lower price than the synthetic short underlying at the higher strike, such that the differential may be exploited.Profit and loss characteristics at expiry:

If the pricing differential can be exploited, a profit will occur, the extent of the mis-pricing translating into the level of profit realized. The Box is regularly used by traders to close out positions near expiry. Generally traded at par (zero) for options on futures, and at the net cost of carry for index and equity options. Can be problematic if all positions are not closed out at exactly the same time.

Current Price of the Stock =So= 648Strike Price of Call Option=Kc1= 620Premium of Call Option=c1=Rs. 34.65Strike Price of Put Option=Kp1= 620Premium of Put Option=P1= Rs. 7.85Strike Price of Call Option=Kc2= 680Premium of Call Option=C2=Rs. 6.95Strike Price of Put Option =Kp2= 680Premium of Put Option =P2= Rs. 36.5


PAY-OFF TABLE

St

Premium for Kc1

Gain / Loss on

Kc1

Premium for Kp1

Gain / Loss on

Kp1

Premium for Kc2

Gain / Loss on

Kc2

Premium for Kp2

Gain / Loss on

Kp2Total

Gain/Loss

600 34.65 -34.65 7.85 -12.15 6.95 6.95 36.5 43.5 3.65601 34.65 -34.65 7.85 -11.15 6.95 6.95 36.5 42.5 3.65602 34.65 -34.65 7.85 -10.15 6.95 6.95 36.5 41.5 3.65603 34.65 -34.65 7.85 -9.15 6.95 6.95 36.5 40.5 3.65604 34.65 -34.65 7.85 -8.15 6.95 6.95 36.5 39.5 3.65605 34.65 -34.65 7.85 -7.15 6.95 6.95 36.5 38.5 3.65606 34.65 -34.65 7.85 -6.15 6.95 6.95 36.5 37.5 3.65607 34.65 -34.65 7.85 -5.15 6.95 6.95 36.5 36.5 3.65608 34.65 -34.65 7.85 -4.15 6.95 6.95 36.5 35.5 3.65609 34.65 -34.65 7.85 -3.15 6.95 6.95 36.5 34.5 3.65610 34.65 -34.65 7.85 -2.15 6.95 6.95 36.5 33.5 3.65611 34.65 -34.65 7.85 -1.15 6.95 6.95 36.5 32.5 3.65612 34.65 -34.65 7.85 -0.15 6.95 6.95 36.5 31.5 3.65613 34.65 -34.65 7.85 0.85 6.95 6.95 36.5 30.5 3.65614 34.65 -34.65 7.85 1.85 6.95 6.95 36.5 29.5 3.65615 34.65 -34.65 7.85 2.85 6.95 6.95 36.5 28.5 3.65616 34.65 -34.65 7.85 3.85 6.95 6.95 36.5 27.5 3.65617 34.65 -34.65 7.85 4.85 6.95 6.95 36.5 26.5 3.65618 34.65 -34.65 7.85 5.85 6.95 6.95 36.5 25.5 3.65619 34.65 -34.65 7.85 6.85 6.95 6.95 36.5 24.5 3.65620 34.65 -34.65 7.85 7.85 6.95 6.95 36.5 23.5 3.65621 34.65 -33.65 7.85 7.85 6.95 6.95 36.5 22.5 3.65622 34.65 -32.65 7.85 7.85 6.95 6.95 36.5 21.5 3.65623 34.65 -31.65 7.85 7.85 6.95 6.95 36.5 20.5 3.65624 34.65 -30.65 7.85 7.85 6.95 6.95 36.5 19.5 3.65625 34.65 -29.65 7.85 7.85 6.95 6.95 36.5 18.5 3.65626 34.65 -28.65 7.85 7.85 6.95 6.95 36.5 17.5 3.65627 34.65 -27.65 7.85 7.85 6.95 6.95 36.5 16.5 3.65628 34.65 -26.65 7.85 7.85 6.95 6.95 36.5 15.5 3.65629 34.65 -25.65 7.85 7.85 6.95 6.95 36.5 14.5 3.65630 34.65 -24.65 7.85 7.85 6.95 6.95 36.5 13.5 3.65631 34.65 -23.65 7.85 7.85 6.95 6.95 36.5 12.5 3.65632 34.65 -22.65 7.85 7.85 6.95 6.95 36.5 11.5 3.65633 34.65 -21.65 7.85 7.85 6.95 6.95 36.5 10.5 3.65634 34.65 -20.65 7.85 7.85 6.95 6.95 36.5 9.5 3.65635 34.65 -19.65 7.85 7.85 6.95 6.95 36.5 8.5 3.65636 34.65 -18.65 7.85 7.85 6.95 6.95 36.5 7.5 3.65637 34.65 -17.65 7.85 7.85 6.95 6.95 36.5 6.5 3.65638 34.65 -16.65 7.85 7.85 6.95 6.95 36.5 5.5 3.65639 34.65 -15.65 7.85 7.85 6.95 6.95 36.5 4.5 3.65640 34.65 -14.65 7.85 7.85 6.95 6.95 36.5 3.5 3.65641 34.65 -13.65 7.85 7.85 6.95 6.95 36.5 2.5 3.65


642 34.65 -12.65 7.85 7.85 6.95 6.95 36.5 1.5 3.65643 34.65 -11.65 7.85 7.85 6.95 6.95 36.5 0.5 3.65644 34.65 -10.65 7.85 7.85 6.95 6.95 36.5 -0.5 3.65645 34.65 -9.65 7.85 7.85 6.95 6.95 36.5 -1.5 3.65646 34.65 -8.65 7.85 7.85 6.95 6.95 36.5 -2.5 3.65647 34.65 -7.65 7.85 7.85 6.95 6.95 36.5 -3.5 3.65648 34.65 -6.65 7.85 7.85 6.95 6.95 36.5 -4.5 3.65649 34.65 -5.65 7.85 7.85 6.95 6.95 36.5 -5.5 3.65650 34.65 -4.65 7.85 7.85 6.95 6.95 36.5 -6.5 3.65651 34.65 -3.65 7.85 7.85 6.95 6.95 36.5 -7.5 3.65652 34.65 -2.65 7.85 7.85 6.95 6.95 36.5 -8.5 3.65653 34.65 -1.65 7.85 7.85 6.95 6.95 36.5 -9.5 3.65654 34.65 -0.65 7.85 7.85 6.95 6.95 36.5 -10.5 3.65655 34.65 0.35 7.85 7.85 6.95 6.95 36.5 -11.5 3.65656 34.65 1.35 7.85 7.85 6.95 6.95 36.5 -12.5 3.65657 34.65 2.35 7.85 7.85 6.95 6.95 36.5 -13.5 3.65658 34.65 3.35 7.85 7.85 6.95 6.95 36.5 -14.5 3.65659 34.65 4.35 7.85 7.85 6.95 6.95 36.5 -15.5 3.65660 34.65 5.35 7.85 7.85 6.95 6.95 36.5 -16.5 3.65661 34.65 6.35 7.85 7.85 6.95 6.95 36.5 -17.5 3.65662 34.65 7.35 7.85 7.85 6.95 6.95 36.5 -18.5 3.65663 34.65 8.35 7.85 7.85 6.95 6.95 36.5 -19.5 3.65664 34.65 9.35 7.85 7.85 6.95 6.95 36.5 -20.5 3.65665 34.65 10.35 7.85 7.85 6.95 6.95 36.5 -21.5 3.65666 34.65 11.35 7.85 7.85 6.95 6.95 36.5 -22.5 3.65667 34.65 12.35 7.85 7.85 6.95 6.95 36.5 -23.5 3.65668 34.65 13.35 7.85 7.85 6.95 6.95 36.5 -24.5 3.65669 34.65 14.35 7.85 7.85 6.95 6.95 36.5 -25.5 3.65670 34.65 15.35 7.85 7.85 6.95 6.95 36.5 -26.5 3.65671 34.65 16.35 7.85 7.85 6.95 6.95 36.5 -27.5 3.65672 34.65 17.35 7.85 7.85 6.95 6.95 36.5 -28.5 3.65673 34.65 18.35 7.85 7.85 6.95 6.95 36.5 -29.5 3.65674 34.65 19.35 7.85 7.85 6.95 6.95 36.5 -30.5 3.65675 34.65 20.35 7.85 7.85 6.95 6.95 36.5 -31.5 3.65676 34.65 21.35 7.85 7.85 6.95 6.95 36.5 -32.5 3.65677 34.65 22.35 7.85 7.85 6.95 6.95 36.5 -33.5 3.65678 34.65 23.35 7.85 7.85 6.95 6.95 36.5 -34.5 3.65679 34.65 24.35 7.85 7.85 6.95 6.95 36.5 -35.5 3.65680 34.65 25.35 7.85 7.85 6.95 6.95 36.5 -36.5 3.65681 34.65 26.35 7.85 7.85 6.95 5.95 36.5 -36.5 3.65682 34.65 27.35 7.85 7.85 6.95 4.95 36.5 -36.5 3.65683 34.65 28.35 7.85 7.85 6.95 3.95 36.5 -36.5 3.65684 34.65 29.35 7.85 7.85 6.95 2.95 36.5 -36.5 3.65685 34.65 30.35 7.85 7.85 6.95 1.95 36.5 -36.5 3.65


FINDINGS:

(1) Open Interest & Put/Call Ratio are the most important indicators which help to determine the trend of Nifty for the next trading day.

(2) Put/Call Ratio can be calculated on the basis of:(a) Open Interest(b) VolumeFor calculating Put/Call Ratio, Open Interest turned to more accurate base than Volume for determining the trend of nifty for the next trading day as it sort out all the outstanding positions from the total Volume.

(3) In determining the trend of the nifty for the next trading day, Analysis of Put/Call Ratio proves to be more accurate compared to the Open Interest Analysis.

(4) For even better Outcome, one can use the combination of Open Interest & Volume for calculating the Put/Call Ratio to determine the trend of nifty in the next trading day.

(5) Basically there are types four types of Outlooks prevailing in the derivatives market

(a) Bullish View(b) Bearish View(c) Range bound View(d) Volatile View

(6) The following table reflects the best suited strategies against each view:

VIEW STRATEGYBULLISH (a) Collar Strategy

(b) Short Combo(c) Long Strap

BEARISH (a) Reverse Collar(b) Long Combo(c) Long Strip

Volatile (a) Long Guts(b) Long Straddle(c) Short Condor

Range Bound (a) Double Top(b) Christmas Trees


(7) By practicing such type of trading strategy, one can earn unlimited profits if the market turns in favorable zone & if the market moves other way round, loss exposure is limited to a certain extent.

(8) By practicing such trading strategies, an investor can predict his maximum loss in advance which is not the case if he trades without framing such trading strategies.

(9) There are certain Opportunistic trading strategy in the market in which one can earn fixed amount of profit, irrespective of the market movement, such type of Trading strategies are known as Arbitrage Trading strategies which are not readily available but one has to grab such opportunities from the market from the price movements.


CONCLUSION:

There are many indicators which can be used while trading in derivative market but widely used & more effective are open interest & put call ratio. Investors can study both together & can arrive at meaningful trend. These indicators can also be jointly used with technical analysis indicators to find out profitable buying & selling points.

Trading strategy can be framed by individual taking several considerations like view for the market-bullish, bearish or uncertain, type of trader-hedger, speculator or arbitrageur, risk appetite, period of investment, type of analysis-fundamental or technical analysis etc.But important thing is to minimize loss & take the right opportunity. Now a day markets are very volatile, so it is in the interest of investors to frame volatile market strategies as stated above rather than to have one view. Investors should have constant look on the market to execute opportunistic strategies which gives fix amount of profit irrespective of market fluctuations. Investors rather than keeping one view bullish or bearish its better to have volatile market strategy with limited loss and limited profits.


BIBLIOGRAPHY

BOOKS:

OPTIONS AND FUTURES –IN INDIAN PERSPECTIVE D. C. PATWARI

OPTIONS, FUTURES AND OTHER DERIVATIVES JOHN C. HULL

TECHNICAL ANALYSIS OF FUTURES MARKET JOHN MURPHY

FUTURES AND OPTIONS N.D. VOHRA & B.R. BAGRI

WEB SITES:

www.sebi.comwww.bseindia.comwww.nseindia.comwww.derivativesindia.comwww.hathwaysecurities.comwww.moneycontrol.comwww.arcadiastock.comwww.anagram.com

SOFTWARE:

CAPITALINE NEO ODIEN DIET OF NSE


http://www.arcadiastock.com/

GLOSSARY

American-style Option: An option contract that may be exercised at any time between the date of purchase and the expiration date.

At-the-money: Option whose exercise price is the same as the market price of the underlying asset.

Bear: Someone who thinks market prices will decline.

Bull: Someone who thinks market prices will rise.

Call: An option contract granting the purchaser the right to buy the underlying instruments at the agreed strike price. A call obliges the seller to sell the underlying instrument at the agreed strike price, if the option is assigned to him.

Cash settlement: Settlement of a contract by payment or receipt of a settlement amount instead of the physical delivery of the underlying asset.

Closing: Conducting a transaction, which offsets the original trade and liquidates an existing position.

Contract unit: The number of units of the underlying instrument on which the contract bears, i.e. contract size. This may vary according to the underlying on which the contract bears.

European-style options: An option that can be exercised by the buyer only on the contract expiration date.

Exercise: A decision, reserved for the option holder, to request execution of the contract.

Expiration date: The date on which the option contract expires.

Hedge: A conservative strategy used to limit investment loss by effecting a transaction, which offsets an existing position.

Holder: The party who purchased an option.


In-the-money: A call is said to be "in-the-money" when the value of the underlying instrument is greater than the option strike price. A put is "in-the-money" when its strike price is greater than the value of the underlying instrument.

Intrinsic value: The intrinsic value of an option is the difference between the actual price of the underlying security and the strike price of the option. The intrinsic value of an option reflects the effective financial advantage that would result from the immediate exercise of that option.

Liquidity: Market situation in which quick purchase or sale of a security is possible without causing substantial changes in prices.

Long position: An investor’s position where the number of contracts bought exceeds the number of contracts sold. He is a net holder.

Lot size: Number of contract you want to buy or sell

Maintenance Margin: A set minimum margin that a customer must maintain in his margin account.

Mark-To-Market: Valuation of a financial instrument according to the current trading value (price) on the exchange.

Open interest: The number of outstanding option contracts in the exchange market or in a particular class or series.

Option: A contract that conveys the right, but not the obligation, to buy or sell a particular item at a certain price for a limited time. Only the seller of the option is obligated to perform.

Out-of-the-money: A call is "out-of-the-money" when the value of the underlying instrument is less than the option strike price. A put is "out-of-the-money" when its strike price is less than the value of the underlying instrument.

Premium: The price of an option–the sum of money that the option buyer pays and the option seller receives for the rights granted by the option.

Put: An option contract granting the purchaser the right to sell the underlying instruments at the agreed strike price. A put obliges the seller to purchase the underlying instrument at the agreed strike price, if the option is assigned to him.


Short position: An investor’s position where the number of contracts sold exceeds the number of contracts bought. The person is a net seller.

Spot Price: Refers to the underlying current market price.

Strike price or exercise price: The price at which the option holder may purchase (in case of call) or sell (in case of put) the underlying instrument.

Time value: It is determined by the remaining lifespan of the option, the volatility and the cost of refinancing the underlying asset (interest rates).

Time value = option price - intrinsic value

Underlying asset, underlying instrument: The instrument (shares, bonds, stock index…) that can be purchased (in case of call) or sold (in case of a put) by a buyer who exercises his option.

Volatility: It is a measure for the fluctuation range of the underlying price. The greater the volatility, the higher the option price.


Study of Nifty Derivatives & Risk Minimization Trading Strategy

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