risk management in equity derivative market by ashish pugalia

Risk Management in Equity Derivative Market

1

Ashish Dilipkumar Pugalia

(08BS0002411)

5/21/2009


A REPORT

ON

By


2

A REPORT

ON

“RISK MANAGEMENT IN EQUITY

DERIVATIVE MARKET”

Submitted By:

Ashish Dilipkumar Pugalia

Enrollment No: 08BS0002411

INDIA INFOLINE LIMITED

A report submitted in partial fulfillment of the requirement

of MBA program of

ICFAI Business School, Ahmedabad

Faculty Guide Company Guide

Prof. Bharat Kantharia Mr. Chintan Shah

Date: 21sh

May, 2009


3

ACKNOWLEDGEMENT

I take this opportunity to thank all those who have helped and inspired me during

the course of time of this project without which the successful completion of the

project would not have been possible.

Firstly, I take this opportunity to thank Prof. P. Bala Bhaskaran (Director, IBS

Ahmedabad), who has always stood by me and encouraged me to embark on the

path of learning.

I wish to convey my special thanks to Mr. Dhiraj Chaudhary (AVP),

Mr. Ishwarsinh Rajpurohit (Territory Manager), my company project guide

Mr. Chintan Shah (Sales Manager) and team members Mr. Mohan Mevada

(RM) and Mr. Mitesh Gandhi (RM) who have helped me directly or indirectly in

my difficulties at India Infoline Ltd., Area Office, Surat. who have been a constant

source of inspiration and encouragement to me.

I wish to express my deepest and most sincere thanks to my Faculty Guide,

Prof. Bharat Kantharia, who has continuously guided me throughout this project.

Last but not the least I would like to thank my fellow management trainees from

IBS, Ahmedabad. By interacting with them, I was able to generate more

meaningful ideas that have enabled me to further complete this project

successfully.

Ashish Pugalia

08BS0002411


4

TABLE OF CONTENT

Acknowledgment………………………………………………………………….3

Abstract……………………………………………………………………………6

Executive Summary………………………………………….……………………7

Introduction……………………………………………………………………….8

Objective of the Project……………………….………………….………….8

Benefit for India Infoline Ltd…………………………...…………………...8

Limitation of the Project………………………………..…..……………….8

Methodology……………………………………………….………………..9

Company Profile………………………………………………………………...10

Indian Equity Market…………………………………………………………...12

Derivatives…………………………………………………………………13

Participants in Derivative Market………………………………………….14

Types of Derivative Market……………….…………………………………….17

Forward Contract…………………..………….……………………………17

Future Contract……………………..………….…………………………...18

Options……………………………………………………………………..10

Options Strategies…………………………………..……………………………23

Buy Future……………………………………...…………………………..23

Sell Future……………………………………...…………………………..24

Buy Call. …………………………………….…..…………………………25

Buy Put…………………………………………..…………………………26

Sell Call…………………………………………….………………………28

Sell Put……………………………………………………………………..30

Bull Spread(Call) ……………………………………..……………………31

Bull spread (Put)……………………………………………………………33

Bear Spread (Call)………………………………………………………….34

Bear Spread (Put) ……………………………………….…………………35


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Buy Straddle ……………………………………………………………….36

Sell Straddle ……………………………………...………………………..37

Buy Strangle ……………………………………....……………………….39

Sell Strangle ……………………………………….………………………40

Long Butterfly ……………………………………..………………………42

Short Butterfly ……………………………………..………………………43

Black Scholes Options Pricing Model………………..…………………………46

Findings.……………………………………………...…………………………..51

Conclusions ………………………………………………………………………52

Recommendations ……….………………………………………………………54

References ……………………………………………………………………….55

Annexure ………………………...………………………………………………56

Glossary …………………………...……………………………………………..70


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ABSTRACT

Derivative Market is high risk high return segment of an equity market. The past

decade has witnessed a massive growth in the use of financial derivatives by a

wide range of corporate and financial institutions. This growth has run in parallel

with the increasing direct reliance of companies on the capital market as the major

source of long term funding. In this respect, derivatives have a vital role to play in

enhancing shareholder value by ensuring access to the cheapest source of funds.

During this project I got to know different ways or different strategies by using

which investor can minimize the loss. An individual always faces the problem as to

which strategy investor should use in different market condition. During this

course of Internship I had gather a good knowledge of cash and derivative market.

This knowledge was helpful in my project to achieve the objective.

I had applied 10 strategies during trading hour on investor from this 10 strategies,

8 strategies was turned out in profit whereas remaining 2 strategies is in loss. By

using Black Schole model I had calculate the option prices from which the investor

or RM will get to know whether to buy the option or not. So that investor gets the

signal of risk while investing in the option market.


7

EXECUTIVE SUMMARY

This is the report submitted by Ashish Dilipkumar Pugalia studying at Icfai

Business School; Ahmedabad, in the partial fulfillment of the requirement of MBA

Program, carried at India Infoline Ltd, Surat. India Infoline Limited is engaged in

providing financial services all across the country and is regarded as the BEST

broking houses in India.

The project is on ―Risk Management in Equity Derivative Market‖ and the

objective of the project is to identify, understand and analyze the strategy which

helps to minimize the Risk in the Indian Equity Derivative Market. Using the

model generated at the end of the project will helpful for the investor by indicating

whether to invest in the option or not.

Equity market reforms are a major constituent of the overall economic reforms in

India and considering the growing surge in the broking firm, the objective of the

project is such set so that it enables to capture the skills required for forming the

bases of the organization.

To achieve the objectives of the project, training was undergone in to gain practical

knowledge and learn about derivatives and its applications and also to know the

behaviors of investor during trading hours. The training enabled to learn the

concepts of the derivatives and the importance of various tools that were used to

undergo the activities to invest in equity market.


8

INTRODUCTION

OBJECTIVE OF THE PROJECT:

To learn the basics of secondary market. It includes learning various

terminologies used for day-to-day trading.

To learn about derivatives and its application.

To identify, understand and analyze the strategy which helps to minimize the

Risk in the Indian Equity Derivative Market.

To implement strategies on investor portfolio and measures the profit and

loss after implementing the strategies.

BENEFIT FOR INDIA INFOLINE LTD:

Before trading hour all RM read the Research report of the company to

know the current day strategy with help of this strategies RM can able to

know the strategy which will ultimately benefit for the investor.

As per the condition of the market RM will be able to identify which will be

the strategies for the current market condition to implement in the option

market.

LIMITATIONS OF STUDY:

Some of the major limitations of this study are as follows:

a) This study is limited to the Equity derivative market. We are not taking

commodity market, which can also be used as a risk marketing tool in

derivative market.

b) My study is to reduce/minimize the risk in derivative market but we can

just minimize or reduce the risk, and can’t make it to zero.


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c) Brokerage and other charges like security transaction tax and service tax

are not considered while investing which sometimes form a very

important part

METHODOLOGY:

Secondary Source

a) Websites

b) Books

c) Data from India Infoline

d) Articles


10

COMPANY PROFILE

“India Infoline Securities Pvt. Ltd.”

“Knowledge is power and power brings security. Risk is a very relative term and

changes with every individual and situation. Financial management is not just

about managing risk but also managing knowledge and finally deriving answers

that generate wealth, security and trust.”

VISION

Vision is to be the most respected company in the financial services space.

To be the premier provider of investment advisory and financial planning

services in India.

PUNCH LINE

―IT’S ALL ABOUT MONEY, HONEY!‖.

OBJECTIVE

To provide unbiased and independent information to market intermediaries and

investors.

BUSINESS DESCRIPTION

The India Infoline group, comprising the holding company, India Infoline Limited

and its wholly-owned subsidiaries, straddle the entire financial services space with

offerings ranging from Equity research, Equities and derivatives trading,

Commodities trading, Portfolio Management Services, Mutual Funds, Life

Insurance, Fixed deposits, Gold, bonds and other small savings instruments to loan


11

products and Investment banking. India Infoline also owns and manages the

websites www.indiainfoline.com and www.5paisa.com .

The company has a network of 596 branches spread across 345 cities and

towns. It has more than 500,000 customers.

BUSINESS STRUCTURE OF INDIA INFOLINE LIMITED

MANAGEMENT TEAM AT INFOLINE LIMITED

Mr. Nirmal Jain Chairman & Managing Director

Mr. R. Venkataraman Executive Director

Mr. Nilesh Vikamsey Independent Director

Mr. Sat Pal Khattar Non Executive Director

Mr. Kranti Sinha & Mr. Arun K. Purvar Independent Director

http://www.indiainfoline.com/

http://www.5paisa.com/


12

INDIAN EQUITY MARKET

The Indian Equity Market is also known as Indian share market or Indian stock

market. The Indian market of equities is transacted on the basis of two major stock

indices, National Stock Exchange of India Ltd. (NSE) and The Bombay Stock

Exchange (BSE).

Indian Equity Market at present is a lucrative field for the investors and investing

in Indian stocks are profitable for not only the long and medium-term investors,

but also the position traders, short-term swing traders and for intra-day traders. In

terms of market capitalization, there are over 2500 companies in the BSE chart list.

Generally the bigger companies are listed with the NSE and the BSE, but there is

the OTCEI or the Over the Counter Exchange of India, which lists the medium and

small sized companies. There is the SEBI or the Securities and Exchange Board of

India which supervises the functioning of the stock markets in India.

The growing financial capital markets of India being encouraged by domestic and

foreign investments is becoming a profitable business more with each day. If all

the economic parameters are unchanged Indian Equity Market will be conducive

for the growth of private equities and this will lead to an overall improvement in

the Indian economy.


13

DERIVATES

In finance, "Derivatives are financial instruments whose price and value derive

from the value of assets underlying them". In other words, they are "financial

contracts whose values derive from the value of underlying stocks, bonds,

currencies, commodities, etc." Examples of the assets which can be referenced by a

derivatives contract are diverse and may be anything from bars of gold

(commodity derivatives), to stocks (equity derivatives), interest rates (interest rate

derivatives), currency exchange rates (currency derivatives), credit risk of third

party obligors (credit derivatives) and even the weather (weather derivatives)

Derivatives can be based on different types of assets such as commodities, equities

or bonds, interest rates, exchange rates, or indices (such as a stock market index,

consumer price index (CPI) — see inflation derivatives — or even an index of

weather conditions, or other derivatives). Their performance can determine both

the amount and the timing of the payoffs. The main use of derivatives is to either

remove risk or take on risk depending if one were a hedger or a speculator. The

diverse range of potential underlying assets and payoff alternatives leads to a huge

range of derivatives contracts available to be traded in the market. The main types

of derivatives are futures, forwards, options and swaps.

THE NEED FOR THE DERIVATIVE MARKET

The derivates market performs a number of economic functions

They help in transferring risks averse people to risk oriented people

They help in the discovery of future as well as current prices

They catalyze entrepreneurial activity

http://en.wikipedia.org/wiki/Finance

http://en.wikipedia.org/wiki/Equity_derivatives

http://en.wikipedia.org/wiki/Interest_rate_derivatives



http://en.wikipedia.org/wiki/Weather_derivatives

http://en.wikipedia.org/wiki/Commodity

http://en.wikipedia.org/wiki/Equities

http://en.wikipedia.org/wiki/Bond_%28finance%29

http://en.wikipedia.org/wiki/Interest_rate

http://en.wikipedia.org/wiki/Exchange_rate

http://en.wikipedia.org/wiki/Stock_market_index

http://en.wikipedia.org/wiki/Consumer_price_index

http://en.wikipedia.org/wiki/Inflation_derivatives

http://en.wikipedia.org/wiki/Contract

http://en.wikipedia.org/wiki/Futures_contract

http://en.wikipedia.org/wiki/Forward_contract

http://en.wikipedia.org/wiki/Option_%28finance%29

http://en.wikipedia.org/wiki/Swap_%28finance%29


14

They increase the volume traded in markets because of participation of risk

averse people in greater numbers

They increase savings and investments in the long run.

FACTORS DRIVING THE GROWTH OF FINANCIAL

DERIVATIVES

1. 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.

PARTICIPANTS IN A DERIVATIVE MARKET

HEDGERS: Hedgers use futures or options markets to reduce or eliminate

the risk associated with price of an asset. For example, the farmers and the

miller both reduce a risk and acquire a risk when they sign the future

contract: The farmer reduces the risk by the way that the prices of wheat will

fall below the price specified in the contract and acquires the risk that the

price of wheat will rise above the price specified in the contract. The miller,

on the other hand, acquires the risk that the price of wheat will rise above the


15

price specifies in the contract. In this way, on party is the insurer (i.e. risk

taker) for one type of risk and the counterparty is the insurer (i.e. risk taker)

for another type of risk.

SPECULATORS: Speculators use futures and options contracts to get extra

leverage in betting on future movements in the price of an asset. They can

increase both the potential gains and potential losses by usage of derivatives

in a speculative venture. Speculators do not aim to minimize risk but rather

to benefit from the inherently risky nature of the futures market. They aims

to profit from the very price change. Hedgers want to minimize their risk no

matter what they’re investing in, while speculators want to increase their risk

and therefore maximize their profits.

ARBITRAGEURS: Arbitrageurs are in business to take advantage of a

discrepancy between prices in two different markets. If, for example, they

see the futures price of an asset getting out of line with the cash price, they

will take offsetting positions in the two markets to lock in a profit. The

simultaneous purchase and sale of an asset in order to profit from a

difference in the price. This usually takes place on different exchanges or

market places. Arbitrageurs are also known as a ―Riskless Profit‖. For

example: Say a domestic stock also trades on a foreign exchange in another

country, where it hasn’t adjusted for the constantly changing exchange rate.

A trader purchases the stock where it is undervalued and short sells the stock

where it is overvalued, thus profiting from the differences.


16

RISK IN DERIVATIVE MARKET

Risk is defined as the chance that an investment's actual return will be different

than expected. This includes the possibility of losing some or all of the original

investment. In risk, the possible outcomes of all the possible events are listed.

Once the events are listed subjectively, the derived probabilities can be assigned to

the entire possible events.

Risk consists of two components, the systematic risk and unsystematic risk.

The systematic risk is caused by factors external to the particular company and

uncontrollable by the company. The systematic risk affects the market as a whole.

In the case of unsystematic risk the factors are specific, unique and related to the

particular industry or company.


17

TYPE OF DERIVATIVES

FORWARD CONTRACT

A forward contract is an agreement between two parties to buy or sell an asset

(which can be of any kind) at a pre-agreed future point in time. Therefore, the trade

date and delivery date are separated. It is used to control and hedge risk, for

example currency exposure risk (e.g. forward contracts on USD or EUR) or

commodity prices (e.g. forward contracts on oil).

One party agrees to sell, the other to buy, for a forward price agreed in advance. In

a forward transaction, no actual cash changes hands. The forward price of such a

contract is commonly contrasted with the spot price, which is the price at which the

asset changes hands (on the spot date, usually two business days). The difference

between the spot and the forward price is the forward premium or forward

discount.

For example, Jewelry manufacturer Goldbuyer agrees to buy gold at Rs. 600 (the

forward or delivery date) from gold mining concern Goldseller. No money changes

hands between Goldbuyer and Goldseller at the time the forward contract is

created. Rather, Goldbuyer’s payoff depends on the spot price at the time of

delivery. Suppose that the spot price reaches Rs. 610 at the delivery date. Then

Goldbuyer gains Rs. 10 on his forward position (i.e. the difference between the

spot and forward prices) by taking delivery of the gold at Rs. 600.

http://en.wikipedia.org/wiki/Hedging

http://en.wikipedia.org/wiki/Currency

http://en.wikipedia.org/wiki/USD

http://en.wikipedia.org/wiki/Euro

http://en.wikipedia.org/wiki/Commodity

http://en.wikipedia.org/wiki/Petroleum

http://en.wikipedia.org/wiki/Forward_price

http://en.wikipedia.org/wiki/Spot_price

http://en.wikipedia.org/w/index.php?title=Spot_date&action=edit

http://en.wikipedia.org/wiki/Business_days

http://en.wikipedia.org/wiki/Premium


18

FUTURE CONTRACT

In finance, a futures contract is a standardized contract, traded on a futures

exchange, to buy or sell a certain underlying instrument at a certain date in the

future, at a specified price. The future date is called the delivery date or final

settlement date. The pre-set price is called the futures price. The price of the

underlying asset on the delivery date is called the settlement price.

A futures contract gives the holder the obligation to buy or sell, which differs from

an options contract, which gives the holder the right, but not the obligation. In

other words, the owner of an options contract may exercise the contract. Both

parties of a "futures contract" must fulfill the contract on the settlement date. The

seller delivers the commodity to the buyer, or, if it is a cash-settled future, then

cash is transferred from the futures trader who sustained a loss to the one who

made a profit. To exit the commitment prior to the settlement date, the holder of a

futures position has to offset his position by either selling a long position or buying

back a short position, effectively closing out the futures position and its contract

obligations.

A Futures contract is similar to a Forward contract, with some expectations.

Futures contracts are traded on exchange markets, whereas forward contracts

typically trade on OTC (over-the-counter) markets. Also, futures contracts are

settled daily (marked-to-market), whereas forwards are settled only at expiration.

http://en.wikipedia.org/wiki/Finance

http://en.wikipedia.org/wiki/Contract

http://en.wikipedia.org/wiki/Futures_exchange



http://en.wikipedia.org/wiki/Underlying

http://en.wikipedia.org/wiki/Financial_instrument

http://en.wikipedia.org/wiki/Option_%28finance%29

http://en.wikipedia.org/wiki/Position_%28finance%29

http://en.wikipedia.org/wiki/Long_position

http://en.wikipedia.org/wiki/Short_position


19

Note: FY ’06 is taken as a base year to calculate the growth in the progressive FY

FY '06 FY '07 FY '08 FY '09

TURNOVER IN LACS 150415342.6 252213791 375083148.8 334703318.1

% GROWTH 0.00% 67.68% 48.72% -10.77%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

0

50000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

Turn

ove

r in

Lac

sGrowth in Future Market

Source: nseindia.com


20

OPTIONS

Options are financial instruments that convey the right, but not the obligation, to

engage in a future transaction on some underlying security. For example, buying a

call option provides the right to buy a specified amount of a security at a set strike

price at some time on or before expiration, while buying a put option provides the

right to sell. Upon the option holder's choice to exercise the option, the party that

sold, or wrote, the option must fulfill the terms of the contract.

For example, Jewelry manufacturer Goldbuyer agrees to buy gold at Rs. 600 (the

forward or delivery date) from gold mining concern Goldseller. Suppose that

Goldbuyer belives that there is some chance for the spot price to fall below Rs.600,

so that he losses on his forward position. To limit his loss, Goldbuyer could

purchase a call option for Rs. 5 (the option price or premium) at a strike or

exercise price of Rs. 600 with an expiration date three months from now. The call

option gives Goldbuyer the right (but not the obligation) to buy gold at the strike

price on the expiration date. Then, if the spot price indeed declines, he could

choose not to exercise the option, and his loss would be limited to the purchase

price of Rs. 5. Alternatively, Goldbuyer may anticipate that the spot price is very

likely to decline, and attempt to profit from such an eventuality by buying a put

option, giving him the right to sell gold at the strike price on the expiration date.

http://en.wikipedia.org/wiki/Underlying

http://en.wikipedia.org/wiki/Call_option

http://en.wikipedia.org/wiki/Strike_price



http://en.wikipedia.org/wiki/Expiration_%28options%29

http://en.wikipedia.org/wiki/Put_option

http://en.wikipedia.org/wiki/Exercise_%28options%29


21

WORKING OF OPTIONS

1. Options give you the right to buy or sell an underlying instrument.

2. If you buy an option, you are not obligated to buy or sell the underlying

instrument; you simply have the right to.

3. If you sell an option and the option is exercised, you are obligated to deliver the

underlying asset (call) or take delivery of the underlying asset (put) at the strike

price of the option regardless of the current price of the underlying asset.

4. Options are good for a specified period of time, after which they expire and you

lose your right to buy or sell the underlying instrument at the specified price.

5. Options when bought are done so at a debit to the buyer.

6. Options when sold are done so by giving a credit to the seller.

OPTIONS

CALL OPTION

BUY SELL

PUT OPTION

BUY SELL


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7. Options are available in several strike prices representing the price of the

underlying instrument.

8. The cost of an option is referred to as the option premium. The price reflects a

variety of factors including the current price of the underlying asset, the strike

price of the option, the time remaining until expiration, and volatility.

9. Options are not available on every stock. There are approximately 2,200 stocks

with tradable options. Each stock option represents 100 shares of a company's

stock.

Note: FY ’06 is taken as a base year to calculate the growth in the progressive FY

FY '06 FY '07 FY '08 FY '09

Turnover in Lacs 33845850.03 79186585.37 136203241.5 372950866.4

% Growth 0.00% 133.96% 72.00% 173.82%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

200.00%

0

50000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

Turn

ove

r in

Lac

s

Growth in Option Market

Source: nseindia.com


23

OPTIONS STRATEGIES

Future Market

There is direct relationship between the Cash and Future market of any scrip.

Direct relationship in this scenario doesn’t mean that there will be same changes in

price in both cash and future market. These relationships indicate that future value

of any scrip is derived from the cash market of that particular scrip. Investor before

investing in any future scrip look at the price change in the cash market so that

while investing in any of the future scrip investor is aware about the somewhat

changes in the cash market of that scrip.

BUY FUTURE

Graph shown below is the example of % change of Reliance future price with the

% change of the Reliance cash market. In this graph one get to know that from 6th

April to 15th

April, 2009 there is more or less same changes of the price changes is

taken place.

-2

0

2

4

6

8

% C

han

ge

6-Apr-09 8-Apr-09 9-Apr-09 13-Apr-09 15-Apr-09

CASH -0.016705882 3.15 0.623529412 2.223529412 3.323529412

FUTURE -1.396237507 3.242210464 0.649617872 2.016460905 3.283362728

Reliance Future and Cash market relationship


24

SELL FUTURE

Graph shown below is the changes in the price of future and cash market of the

INFOSYSTCH. In graph there is a decline in the price of future and cash market

from 6th

April to 15th

April, 2009 which indicates that if there is holding of the

INFOSYSTCH future scrip then an investor must sell the future scrip in between

the given date to reduce the loss in future.

-6

-5

-4

-3

-2

-1

0

1

2

% c

han

ge

6-Apr-09 8-Apr-09 9-Apr-09 13-Apr-09 15-Apr-09

CASH -2.023211502 0.769097523 0.133088738 -1.233449477 -2.696864111

FUTURE -2.832773858 0.428170172 0.356237583 -1.061862026 -2.524491334

INFOSYSTCH future cash market relationship


25

BUY CALL

Strategy View

Investor thinks that the market will rise significantly in the short-term.

Strategy Implementation

Call options are bought with a strike price of a. The more bullish the investor is,

the higher the strike price should be.

Example

Exercise price (a) Rs. 120

Size of the contract 100 share

Price of the share of the date of the

contract

Rs. 124.5

Price of option on the date of contract Rs.10

Profit

Stock Price

Loss


26

Possible price of the share Investor exercise position

100 -1000

110 -1000

120 -1000

130 0

140 1000

150 2000

160 3000

BUY PUT

Strategy View

Investor thinks that the market will fall significantly in the short-term. .


Put option is bought with a strike price of a. The more

bearish the investor is, the lower the strike price should be.

Stock price Payoff from

long call Total pay off

Net profit=

payoff –

premium

S1 >130 S1-120 X >10 X >10-10 = X

>0

S1=130 130 – 120 10 10 – 10 = 0

S1=<120 Not exercised 0 -10


27

Exercise price Rs.110


Share price on the date of the contract Rs 112

Price of put option on the date of contract Rs.7.50

Example



Share price on the date of the contract Rs 112

Price of put option on the date of

contract

Rs.7.50

Option premium paid = 7.5*100 =750

Amount to be paid for the share = 110*100 =11000

Market value of the share = 100*100 =10000

Net profit (loss) = -750+ 11000 -10000 = 250 (profit)

Possible price of the share Investor position

80 +2250

90 +1250

100 +250

110 -750

120 -750

130 -750

140 -750


28


long put Total pay off

Net profit=

payoff -

premium

S1>110 0 not exercise 0 -7.50

S1=102.50 -102.50+110 +7.50 -7.50+7.50 =0

S1<102.50 -X <102.50+110 X >7.50 X>7.50-7.50=

X>0

SELL CALL

Strategy View

Investor is certain that the market will not rise and is unsure/ unconcerned whether

it will fall.


Call option is sold with a strike price of a. If the

investor is very certain of his view then at-the-

money options should be sold, if less certain, then

out-of-the-money ones should be sold.


29

Example

Exercise price (a) Rs. 120


Price of the share of the date of the contract Rs. 124.5

Price of option on the date of contract Rs.10

Possible price of the share Investor exercise position

100 +1000

110 +1000

120 +1000

130 0

140 -1000

150 -2000

160 -3000


short call Total pay off

Net profit=

payoff +

premium

S1 >130 130-S1 -X <0 -X-10 = -X <0

S1=130 130 – 120 10 10 – 10 = 0

S1<130 No exercise 0 10


30

SELL PUT

Strategy View

Investor is certain that the market will not go down, but unsure/unconcerned about

whether it will rise.


Put options are sold with a strike price a. If an

investor is very bullish, then in-the-money puts

would be sold.

Example



Share price on the date of the

contract

Rs 112

Price of put option on the date of

contract

Rs.7.50

Option premium received = 7.5*100 =750

Amount to be paid for the share = 110*100 =11000

Market value of the share = 100*100 =10000

Net profit (loss) = 750- 11000 +10000 = 250 (loss)


31

Possible price of the share Investor position

80 -2250

90 -1250

100 -250

110 750

120 750

130 750

140 750


short put Total pay off

Net profit=

payoff +

premium

S1>110 0 not exercise 0 7.50

S1=102.50 102.50-110 -7.50 -7.50+7.50 =0

S1<102.50 X <102.50-110 X <-7.50 X<-7.50+7.50=

X<0

BULL SPREAD (CALL)

Strategy View

Investor thinks that the market will not fall, but wants to cap the risk. Conservative

strategy for one who thinks that the market is more likely to rise than fall.


32


Call option is bought with a strike price of a and

another call option sold with a strike of b,

Investor before investing in any of the call or put option looks at the future price of

that scrip then takes the decision to invest in any of the call or put option.

Here investor invests in Reliance Industry. Future price of Reliance on 9th

of April

is Rs. 1701

Type of Option Strike Price Premium on 9th

April,2009

Buy Call 1650 Paid Rs.132

Sell Call 1800 Receives Rs.50

On 15th

April, 2009 investor exercises this option

Profit/ Loss on Buy Call = Sell price- Buy price

= 208.40-132

= 76.40 (Profit)

Profit/Loss on Sell Call = Sell Price-Buy Price

= 50-94.35

= -44.35 (Loss)

Net Profit/Loss = Profit on Buy call + Loss on Sell call

= 76.40 + (-44.35)

= 32.05 (Profit)

E1 E2 • •

Stock price

Profit/loss of

Long call Profit/loss of

short call


33

BULL SPREAD (PUT)

Strategy View

Investor thinks that the market will not fall, but wants to cap the risk. Conservative

strategy for one who thinks that the market is more likely to rise than fall.


Put option is bought with a strike of a and another put sold with a strike of b,

producing a net initial credit.

Here investor invests in Reliance Industry. Future price of Reliance on 6th

of April

is Rs. 1701.

Type of the

option Strike Price

Premium on

option (6th

April)

Put purchase 1650 Paid Rs.

57.85

Put sold 1740 Received Rs.

90

On 15th


Profit/ Loss on Buy Put = Sell price- Buy price

= 23.75-57.85

= -34.10 (Loss)

Profit/Loss on Sell Put = Sell Price-Buy Price

= 90-41.45

= 48.55 (Profit)

E1 E2

• • Stock price

Profit/loss of

Long call Profit/loss of

short call


34

Net Profit/Loss = Loss on Buy Put + Profit on Sell Put

= -34.10 + 48.55

= 14.45 (Profit)

BEAR SPREAD (CALL)

Strategy View

Investor thinks that the market will not rise, but wants to cap the risk. Conservative

strategy for one who thinks that the market is more likely to fall than rise.


Call option is sold with a strike price of a and another call option bought with a

strike of b

Investor before investing in any of the call or put option looks at the future price of

that scrip then takes the decision to invest in any of the call or put option.

Here investor invests in INFOSYSTCH. Future price of INFOSYSTCH on 6th

of

April is Rs. 1460.

Type of the

option

Exercise price of

the option

Premium

on option

Call

purchase 1470

Paid Rs.

41.35

Call sold 1380 Received

Rs. 100

7

0

0

0

0

0

• • Stock price

Profit/ loss from

Long call

Profit/ loss from

short call


35

On 15th



= 13.25 – 41.35

= -28.10 (Loss)


= 100 – 43.15

= 56.85 (Profit)

Net Profit/Loss = Loss on Buy call + Profit on Sell call

= -28.10 + 56.85

= 28.75 (Profit)

BEAR SPREAD (PUT)

Strategy View

Investor thinks that the market will not rise, but wants to cap the risk. Conservative

strategy for one who thinks that the market is more likely to fall than rise.


Put option is sold with a strike of a and

another put bought with a strike of b.

60 70 • • Stock price

Profit/ loss from

Long call

Profit/ loss from

short call


36

On 15th



= 90 – 58.50

= 31.50(Profit)


= 30 – 31.85

= -1.85 (Loss)

Net Profit/Loss = Profit on Buy put + Loss on Sell put

= 31.50 + (-1.85)

= 29.65 (Profit)

BUY STRADDLE

Strategy View

Investor thinks that the market will be very volatile in the short-term.


Call option and put option are bought with

The same strike price a.

Type of the

option Strike Price Premium on option

Put purchase 1440 Paid Rs. 58.50

Put sold 1350 Received Rs. 30

Stock

price

E

profit

loss


37

Here investor invests in Nifty. Future price of Nifty on 6th

of April is Rs. 3281.50.


April,2009

Buy PUT 3300 Paid Rs.125.50

Buy CALL 3300 Paid Rs. 104.50

On 15th



= 44.50 – 125.50

= -81 (Loss)


= 238.20 – 104.50

= 133.70 (Profit)

Net Profit/Loss = Loss on Buy put + Profit on Sell call

= (-81) + 133.70

= 52.20 (Profit)

SELL STRADDLE

Strategy View

Investor is certain that the market will not be very volatile (will neither go up nor

down very much).


A call option and a put option are sold with

the same strike price a.

Here investor invests in RNRL. Future price of RNRL on 6th

of April is Rs. 50.90.

b a c • • •


38


April,2009

Sell CALL 55 Receives Rs. 3

Sell PUT 55 Receives Rs. 5.70

On 15th


Profit/ Loss on Sell Call = Sell price- Buy price

= 3 – 9.50

= -6.50 (Loss)


= 5.70 – 2.25

= 3.45(Profit)

Net Profit/Loss = Loss on sell call + Profit on sell put

= (-6.50) + 3.45

= -3.05 (Loss)

The Reason benefit the Loss in this strategy is that on 6th

April, 2009 the opening

price of RNRL was Rs. 50.90. Future market of RNRL as on 15th April closed at

Rs. 62.25

Date Open Close Change (%)

6-Apr-09 50.90 52.65 3.43

8-Apr-09 50.05 55.6 5.79

9-Apr-09 56.75 56.30 1.37

13-Apr-09 56.75 57.85 3.04

15-Apr-09 57 62.25 8.6


39

BUY STRANGLE

Strategy View

Investor thinks that the market will be very volatile in the short-term [this is similar

to the buy straddle but the premium paid here is less]


Put option is bought with a strike a and a call

option is bought with a strike b.

Here investor invests in DLF. Future price of RNRL on 6th

of April is Rs. 243.05


April,2009

Buy CALL 190 Paid Rs. 17

Buy PUT 220 Paid Rs. 9

On 15th



= 40.80 - 17

= 23.80 (Profit)

loss

profit

Profit / loss from put

option

Profit / loss from call

option

Stock price E1 E2 • •


40

Profit/Loss on Buy Put = Sell Price-Buy Price

= 5.35 – 9

= 3.65(Loss)

Net Profit/Loss = Loss on buy call + Profit on buy put

= 23.80 – 3.65

= 20.15 (Profit)

SELL STRANGLE

Strategy View

The investor thinks that the market will not be volatile within a broadish band.


Put option is sold with a strike price of a and a call option is sold with the higher

strike price b

Here investor invests in ICICIBANK. Future price of ICICIBANK on 6th

of April

is Rs. 370.

Investor think that the future price of this scrip will move in the range of Rs.360 –

Rs.410 investor estimate this range by looking at the opening price of the

ICICIBANK.

a b • • • • c d


41


April,2009


Sell PUT 360 Receives Rs. 21

On 15th



= 14 – 48

= -34 (Loss)


= 21 – 4.4

= 16.60(Profit)

Net Profit/Loss = Loss on sell call + Profit on sell put

= (-34) + 16.60

= 17.40 (Loss)

The Reason benefit the Loss in this strategy is that on 6th

April, 2009 the opening

price of RNRL was Rs. 370. Future market of ICICIBANK as on 15th

April closed

at Rs. 445.05

Date Open Close Change (%)

6-Apr-09 370 375.85 1.58

8-Apr-09 378.35 378.35 0.67

9-Apr-09 397.25 397.25 5.10

13-Apr-09 416.35 416.35 5.16

15-Apr-09 445.05 445.05 7.75


42

LONG BUTTERFLY

Strategy View

Investor thinks that the market will not be volatile, but wants to cap the downside

risk. .


Call option with low strike b bought and 2 call options with medium strike a sold

and call option with high strike c bought.

Here investor invests in RELIANCE.


April,2009


Sell 2 CALL 1710 Receives Rs. (76*2) = Rs.

152


On 15th



= 85 - 175

= 90 (Profit)

Profit/Loss from

Short calls

Profit/Loss from

long calls

Profit/Loss from

Long calls

a b c d e • • • • •


43

Profit/Loss on Sell of 2 Call = Sell Price-Buy Price

= (76*2) – (155.65*2)

= -159.30 (Loss)


= 134.50 - 53

= 81.50 (Profit)

Net Profit/Loss = Profit on buy call + Loss on sell of 2 call + Profit on buy call

= 90 + (-159.30) + 81.50

= 12.20 (Profit)

SHORT BUTTERFLY

Strategy View

Investor mildly thinks that the market will be volatile.


Call option is sold with strike b, two call options are

bought with strike a and a call option is sold with strike c.

E1

E2

E3

a b c • • •

profit

loss


44

Here investor invests in INFOSYSTCH


April,2009


Buy 2 CALL 1410 Paid Rs. (29.85 *2) = Rs.

59.70


On 15th



= 100 – 43.15

= 56.85 (Profit)

Profit/Loss on Buy of 2 Call = Sell Price-Buy Price

= (29.85*2) – (71.15*2)

= -82.60 (Loss)


= 65 – 19.70

= 45.30 (Profit)

Net Profit/Loss = Profit on sell call + Loss on buy of 2 call + Profit on sell call

= 56.85 + (-82.60) + 45.30

= 19.55 (Profit)

Out of the 10 strategies, 8 strategies are turn out in profit for the investor and 2

strategies are in loss beard by the investor at India Infoline Limited.


45

Strategy Profit/ Loss (Rs.)

Bull Spread (Call) Profit – Rs. 29.10

Bull Spread (Put) Profit – Rs. 14.45

Bear Spread (Call) Profit – Rs. 28.75

Bear Spread (Put) Profit – Rs. 29.65

Buy Straddle Profit – Rs. 52.20

Sell Straddle Loss – Rs. 3.05

Buy Strangle Profit – Rs. 20.15

Sell Strangle Loss – Rs. 17.40

Long Butterfly Profit – Rs. 12.20

Short Butterfly Profit – Rs. 19.55


46

BLACK SCHOLES OPTION PRICING MODEL

The Black Shcoles Model is one of the most import concepts in modern financial

theory. It was developed in 1973 by Fisher Black, Robert Merton and Myron

Scholes and is still widely used today, and regarded as one of the best ways of

determining fair prices of options. The Black-Scholes option pricing formula prices

European put or call options on a stock that does not pay a dividend or make other

distribution. The formula assumes the underlying stock prices follow a constant

volatility.

The Black-Scholes formulas for the prices of European calls and puts on a non-

dividend paying stock are:

C= S0 N(d1) – E e-rt

N(d2)

P= E e-rt

N(-d2) – S0 N(-d1)

Where, d1 = ln(S0 / E) + (r + 0.5s2)t

s t1/2

d2 = d1 – s t1/2

The Greeks – Delta, Gamma, Vega, Theta and Rho – for the CALL are:

Delta = N (d1)

Gamma = s N (d1)

S0 s t

1/2

Vega = S0 N (d1) t

1/2


47

Theta = - S0 N (d1) s – r E e-rt

N (d2)

2 t1/2

Rho = E t e

-rt N (d2)

Where, N denotes the standard normal

The Greeks – Delta, Gamma, Vega, Theta and Rho – for the PUT are:

Delta = N (d1) – 1

Gamma = s N (d1)

S0 s t1/2

Vega = S0 N (d1) t1/2

Theta = - S0 N (d1) s + r E e-rt

N (-d2)

2 t1/2

Rho = -E t e-rt

N (-d2)

Also, C = Current value of the Call option

P = Current value of the Put option

r = continuously compounded risk-free rate of interest

S0 = Current price of the option

E = Exercise price of the option

t = time remaining before the expiration date (expressed as the fraction of a

year)


48

s = standard deviation of the continuously compounded annual rate of return

ln(S0 / E) = natural logarithm of (S0 / E)

N (d) = value of the cumulative normal distribution evaluated at d.

Assumption underlying Black and Scholes Model

1. The option being values is a European style option, with no possibility of an

early exercise. Comparable American call options are more valuable because

they provide greater flexibility of exercise.

2. There are no transaction (dealing) costs and there are no taxes.

3. The risk-free interest rate is known and constant over the life of the option.

4. The market is an efficient one. This implies that as a rule, the people cannot

predict the direction of the market or any individual stock.

5. The underlying security pays no dividends during the life of the option.

6. The volatility of the underlying instrument is known and is constant over the

life of the option.

7. The distribution of the possible share prices at the end of a period of time is

log normal or, in other words, a share’s continuously compounded rate of

return follows a normal distribution.


49

In this model I had generated different sheet and named them as per the condition

of the market. In each sheet, by using Black & Schole Model I had calculated

Option price, Delta, Gamma, Vega, Theta and Rho which will helpful for India

Infoline Ltd. These calculations are both for CALL and PUT option.

As per the model, the option prices calculated are the European option prices. This

calculated option prices are the theoretical option prices.

While investing in the option market if the theoretical (calculated) option

prices are more than the current prices then the investor will get to know that

there is risk in investing such option.


50

If the theoretical (calculated) option prices are less than the current then by

using this one can invest in the option market.

Beside the calculation of option prices in the figure there is a calculation of

profit and loss booked by the investor in the option market. If an investor or the

RM enter the Quantity, Buy and Sell price then one can easily get to know

whether profit or loss.

For an Investor or RM, this model is very easy to understand because the names

of the sheet indicate the condition of the market.

Next thing is that whatever is the condition of the market if an Investor or RM

investor forget what to do in a particular strategy whether to buy or sell the call

or put option at same or different strike price then one can see the condition in

each sheet whether to buy or sell call or put option at same or different strike

price. At the same time what is the profit/ Loss investor has booked by

investing in the option market can easily identify.


51

FINDINGS

Sentiments Sub-sentiments Strategy Diagrams

Bullish Very Bullish Buy Call

Moderately Bullish + Certain that the

market will not fall

Sell Put

Moderately Bullish + fairly certain that

the market will not fall

Bull Spread (Call) or

Bull Spreads (Put)

Bearish Very Bearish Buy Put

Certain that the market will not rise Sell Call

Moderately Bearish + Fairly certain that

the market will not rise

Bear Spread (Call)

or Bear Spread (Put)

Neutral Expect prices to fluctuate in very

narrow range

Sell Straddle

Prices might fluctuate in a broader range Sell Strangle

Moderately certain that prices will not

fluctuate much

Long Butterfly

Volatile Expect prices to be very volatile Buy Straddle

Expect prices to be volatile Buy Strangle

Moderately expect prices to be volatile Short Butterfly


52

CONCLUSIONS

The project provided me with an insight into deeper areas of the derivative market.

While doing the project I was exposed to various new terminologies and newer

methods of handling investments.

I want to conclude this project by dividing the option strategies into Bullish,

Bearish and Neutral & by analyzing which strategies give more profit as per the

market condition.

BULLISH STRATEGIES

A. Buy Call: This strategy is very easy to implement and give good amount of

return if price increase. Here maximum loss is only the premium paid.

B. Buy Futures: Futures has given large amount of profits as compared to

options strategies but at the same time risk associated with it also very high.

C. Bull Spread (Call): It provides limited profits and limited loss. If Index/

Scrip goes up then one can have profits and vice-versa. This strategy should

be use when expected volatility in the market is less.

D. Bull Spread (Put): It provides limited profit and limited loss. The

maximum gain can be net premium received in this strategy.

E. Sell Put: In this strategy maximum profit is premium received and loss is

unlimited. If a person expects bullish view then he may go with this strategy

but this strategy is quite risky.


53

NEUTRAL STRATEGIES

F. Buy Straddle: This strategy should only be used when expected volatility is

very high and market outlook is not known. If scrip remains at the same

price then loss will be maximum

G. Buy Strangle: This strategy should be used in very volatile market.

H. Sell Strangle: This strategy should be used when volatility is very less.

I. Long Butterfly: In this strategy there is very minimum risk and limited

profit. This strategy should be used when proper strike prices are available

to make this strategy.

J. Short Butterfly: This strategy led to profit when volatility is very high in

the option market.

K. Sell Straddle: When investor want more returns at higher risk then he may

go with this strategy. IF suddenly the volatility increases at a very high rate

then huge losses may occur.

BEARISH STRATEGIES

L. Buy Put: This strategy should be used when investors perceive that the

option price will go down.

M. Sell Future: This strategy can be use to hedge or it can be use as a

speculative strategy when option market is expected to fall.

N. Bear Spread (Put) & Bear Spread (Call): This strategy involves very less

risk & bearish outlook. So for those investors who expect the option prices

will go down but they are not sure about it then they may use this strategy.

O. Sell Call: In this strategy maximum profit earned and maximum loss is

unlimited. So less risk takers should select very lower strike price while

selecting this strategy.


54

RECOMMENDATIONS

After studying about financial derivatives and different derivative strategies

following recommendations are suggested:

Many strategies like straddle, strip, strangle and butterfly. Depend upon

volatility of scrip or index and give returns accordingly. So volatility should

be forecasted before forming any strategy.

Fundamental and Technical analysis of the scrip or index should be doen

before formulating any strategy.

Specific strategy should be used according to the purpose of investor instead

of investing haphazardly in futures and options.

Derivative market is highly ill- famed among the investor. Thus it is required

to provide in depth knowledge of the market to investors.

Strategies should be evaluated daily for better returns and less risk.

Theoretical price of an option should be found out using option pricing

model (Black & Scholes) and those options whose price is less than

theoretical price should be used for formulation of strategy.

By using a hedging strategy an investor can recover some of his losses and

can also make profit.

When the movement and volatility of market or scrip is not known at that

time investor should use hedging strategies.

Investor should make strategy according to position cash market and

accordingly make strategy.


55

REFERENCES

Books

(a) Options, futures and Other Derivatives by JOHN C. HULL

(b) NCFM Derivative Market (dealers) Module

(c) ―Future and Option‖ second edition Tata McGraw- Hill by N D VOHRA,

B R Bagri

Websites

(a) www.nseindia.com

(b) www.moneysonteol.com

(c) www.bseindia.com

(d) www.indiainfoline.com

(e) www.investopedia.com

(f) http://www.cboe.com/Strategies/EquityOptions/BuyingCalls/Part1.aspx

(g) http://www.quickmba.com/finance/black-scholes/

(h) http://www.riskglossary.com/link/black_scholes_1973.htm

http://www.nseindia.com/

http://www.moneysonteol.com/

http://www.bseindia.com/

http://www.indiainfoline.com/

http://www.investopedia.com/

http://www.cboe.com/Strategies/EquityOptions/BuyingCalls/Part1.aspx

http://www.quickmba.com/finance/black-scholes/

http://www.riskglossary.com/link/black_scholes_1973.htm


56

ANNEXURE

Instrument Symbol Date Expiry Open High Low Close

FUTSTK DLF

6-Apr-

09

30-Apr-

09 206.7 221.8 198.1 201.1

FUTSTK DLF

8-Apr-

09

30-Apr-

09 193 209.9 186 207.85

FUTSTK DLF

9-Apr-

09

30-Apr-

09 213 220.4 201.1 214.85

FUTSTK DLF

13-Apr-

09

30-Apr-

09 216 232.45 212.3 228.8

FUTSTK DLF

15-Apr-

09

30-Apr-

09 221 253.25 219 243.6

DLF Future (SOURCE: nseindia.com)

Instrument Symbol Option Date Expiry

Strike

Price Open High Low Close

OPTSTK DLF PA

6-Apr-

09

30-Apr-

09 190 9 18 9 16.9

OPTSTK DLF PA

8-Apr-

09

30-Apr-

09 190 19 21.85 12.2 12.8

OPTSTK DLF PA

9-Apr-

09

30-Apr-

09 190 11.1 14 9 10.65

OPTSTK DLF PA

13-Apr-

09

30-Apr-

09 190 10.4 10.5 7.7 8.3

OPTSTK DLF PA

15-Apr-

09

30-Apr-

09 190 7.5 8 4.25 5.35

DLF PUT (STRIKE PRICE: 190) (SOURCE: nseindia.com)


57


Strike


OPTSTK DLF CA

6-Apr-

09

30-Apr-

09 220 17 20 13 15

OPTSTK DLF CA

8-Apr-

09

30-Apr-

09 220 5.3 18 5.3 16.95

OPTSTK DLF CA

9-Apr-

09

30-Apr-

09 220 20.8 21.9 13.5 18.25

OPTSTK DLF CA

13-Apr-

09

30-Apr-

09 220 18.1 29 17.05 26.75

OPTSTK DLF CA

15-Apr-

09

30-Apr-

09 220 21.7 45.35 21.7 40.8

DLF CALL (STRIKE PRICE: 220) (SOURCE: nseindia.com)


FUTSTK ICICIBANK

6-Apr-

09

30-Apr-

09 370 382 363.7 375.85

FUTSTK ICICIBANK

8-Apr-

09

30-Apr-

09 358.3 381.35 350 378.35

FUTSTK ICICIBANK

9-Apr-

09

30-Apr-

09 384.5 402.35 372 397.25

FUTSTK ICICIBANK

13-Apr-

09

30-Apr-

09 405 422.8 404 416.35

FUTSTK ICICIBANK

15-Apr-

09

30-Apr-

09 417 454.75 403.55 445.05

ICICIBANK FUTURE (SOURCE: nseindia.com)


58


Strike


OPTSTK ICICIBANK CA

6-Apr-

09

30-Apr-

09 410 14 14.85 10.95 14.4

OPTSTK ICICIBANK CA

8-Apr-

09

30-Apr-

09 410 9 14.75 8 13.2

OPTSTK ICICIBANK CA

9-Apr-

09

30-Apr-

09 410 13.25 22 11 20.1

OPTSTK ICICIBANK CA

13-Apr-

09

30-Apr-

09 410 25.4 33.5 25.05 29.1

OPTSTK ICICIBANK CA

15-Apr-

09

30-Apr-

09 410 26.45 50 25 48

ICICIBANK CALL (STRIKE PRICE: 410) (SOURCE: nseindia.com)


Strike


OPTSTK ICICIBANK PA

6-Apr-

09

30-Apr-

09 360 21 24.3 17.5 20

OPTSTK ICICIBANK PA

8-Apr-

09

30-Apr-

09 360 25 28 15 16.65

OPTSTK ICICIBANK PA

9-Apr-

09

30-Apr-

09 360 15.75 20 9.95 11.1

OPTSTK ICICIBANK PA

13-Apr-

09

30-Apr-

09 360 6.25 8.25 6.25 7.55

OPTSTK ICICIBANK PA

15-Apr-

09

30-Apr-

09 360 8.1 9.7 3.5 4.4

ICICIBANK PUT (STRIKE PRICE: 360) (SOURCE: nseindia.com)


59


FUTSTK RNRL

6-Apr-

09

30-Apr-

09 50.9 53.3 49.05 52.65

FUTSTK RNRL

8-Apr-

09

30-Apr-

09 50.05 56.7 49 55.6

FUTSTK RNRL

9-Apr-

09

30-Apr-

09 56.75 58.45 55.1 56.3

FUTSTK RNRL

13-Apr-

09

30-Apr-

09 56.75 59.75 56.5 57.85

FUTSTK RNRL

15-Apr-

09

30-Apr-

09 57 62.8 56.3 62.25

RNRL FUTURE (SOURCE: nseindia.com)


Strike


OPTSTK RNRL CA

6-Apr-

09

30-Apr-

09 55 3 4.25 2.4 3.9

OPTSTK RNRL CA

8-Apr-

09

30-Apr-

09 55 2.8 6.25 2.8 5.5

OPTSTK RNRL CA

9-Apr-

09

30-Apr-

09 55 5.9 7.25 5.25 5.8

OPTSTK RNRL CA

13-Apr-

09

30-Apr-

09 55 5.85 7.75 5.5 6.55

OPTSTK RNRL CA

15-Apr-

09

30-Apr-

09 55 6.05 9.9 6.05 9.5

RNRL CALL (STRIKE PRICE: 55) (SOURCE: nseindia.com)


60


Strike


OPTSTK RNRL PA

6-Apr-

09

30-Apr-

09 55 5.7 5.7 5.7 5.7

OPTSTK RNRL PA

8-Apr-

09

30-Apr-

09 55 5.25 6.05 4.8 5.25

OPTSTK RNRL PA

9-Apr-

09

30-Apr-

09 55 4.5 5.25 4 4.5

OPTSTK RNRL PA

13-Apr-

09

30-Apr-

09 55 3.4 4 2.95 3.55

OPTSTK RNRL PA

15-Apr-

09

30-Apr-

09 55 3.8 3.8 2.1 2.25

RNRL PUT (STRIKE PRICE: 55) (SOURCE: nseindia.com)


FUTIDX NIFTY

6-Apr-

09

30-Apr-

09 3281.15 3305.8 3227 3260.25

FUTIDX NIFTY

8-Apr-

09

30-Apr-

09 3180 3368.8 3157.5 3355.5

FUTIDX NIFTY

9-Apr-

09

30-Apr-

09 3409.25 3409.25 3308.6 3355.4

FUTIDX NIFTY

13-Apr-

09

30-Apr-

09 3385 3432.9 3337.3 3390.9

FUTIDX NIFTY

15-Apr-

09

30-Apr-

09 3345 3507.8 3325 3492.9

NIFTY FUTURE (SOURCE: nseindia.com)


61


Strike


OPTIDX NIFTY CE

6-Apr-

09

30-Apr-

09 3300 104.3 119.7 80.5 93.75

OPTIDX NIFTY CE

8-Apr-

09

30-Apr-

09 3300 60 154.25 52 145.8

OPTIDX NIFTY CE

9-Apr-

09

30-Apr-

09 3300 165 178 115.1 140.8

OPTIDX NIFTY CE

13-Apr-

09

30-Apr-

09 3300 155.1 193.15 127.5 161.1

OPTIDX NIFTY CE

15-Apr-

09

30-Apr-

09 3300 139.4 248.75 118.1 238.2

NIFTY CALL (STRKE PRICE: 3300) (SOURCE: nseindia.com)


Strike


OPTIDX NIFTY PE

6-Apr-

09

30-Apr-

09 3300 125.5 153.1 112.55 134.6

OPTIDX NIFTY PE

8-Apr-

09

30-Apr-

09 3300 189 195 85 92.15

OPTIDX NIFTY PE

9-Apr-

09

30-Apr-

09 3300 79.8 109.6 71 87.1

OPTIDX NIFTY PE

13-Apr-

09

30-Apr-

09 3300 71 94.5 61.3 73.6

OPTIDX NIFTY PE

15-Apr-

09

30-Apr-

09 3300 90 95.8 41.25 44.5

NIFTY PUT (STRKE PRICE: 3300) (SOURCE: nseindia.com)


62


FUTSTK INFOSYSTCH

6-Apr-

09

30-Apr-

09 1459.7 1462 1389.1 1418.35

FUTSTK INFOSYSTCH

8-Apr-

09

30-Apr-

09 1392 1431.2 1361.3 1424.6

FUTSTK INFOSYSTCH

9-Apr-

09

30-Apr-

09 1458.9 1458.9 1397.65 1429.8

FUTSTK INFOSYSTCH

13-Apr-

09

30-Apr-

09 1449 1466.35 1382 1414.3

FUTSTK INFOSYSTCH

15-Apr-

09

30-Apr-

09 1360 1386 1310 1377.45

INFOSYSTCH FUTURE (SOURCE: nseindia.com)


Strike


OPTSTK INFOSYSTCH CA

6-Apr-

09

30-Apr-

09 1380 100 100 67.25 85.7


8-Apr-

09

30-Apr-

09 1380 56.1 96 53.1 89.15


9-Apr-

09

30-Apr-

09 1380 75 99.7 75 92.6


13-Apr-

09

30-Apr-

09 1380 116 116 67.25 82


15-Apr-

09

30-Apr-

09 1380 35 47.95 25.65 43.15

INFOSYSTCH CALL (STRIKE PRICE: 1380) (SOURCE: nseindia.com)


63


Strike



6-Apr-

09

30-Apr-

09 1410 71.15 82 52 67.7


8-Apr-

09

30-Apr-

09 1410 51.6 79 40.1 72.1


9-Apr-

09

30-Apr-

09 1410 63.2 77.05 57 70.95


13-Apr-

09

30-Apr-

09 1410 70 75 50.25 64.25


15-Apr-

09

30-Apr-

09 1410 33.1 33.1 16.15 29.85



Strike



6-Apr-

09

30-Apr-

09 1440 65 70 40 53.35


8-Apr-

09

30-Apr-

09 1440 35 59.5 31.5 56.75


9-Apr-

09

30-Apr-

09 1440 50 64 41.3 54.3


13-Apr-

09

30-Apr-

09 1440 70 70 40 49.75


15-Apr-

09

30-Apr-

09 1440 20 23.9 12.5 19.7



64


Strike



6-Apr-

09

30-Apr-

09 1470 41.35 55 28.55 39.35


8-Apr-

09

30-Apr-

09 1470 24.5 46.25 24.5 43.4


9-Apr-

09

30-Apr-

09 1470 35.3 45 34 41.9


13-Apr-

09

30-Apr-

09 1470 47 50 25.25 38.3


15-Apr-

09

30-Apr-

09 1470 13.05 16 7.3 13.25



Strike


OPTSTK INFOSYSTCH PA

6-Apr-

09

30-Apr-

09 1350 30 43.7 26 35.35


8-Apr-

09

30-Apr-

09 1350 42.1 60 31.1 33.8


9-Apr-

09

30-Apr-

09 1350 32 40.5 25 27.5


13-Apr-

09

30-Apr-

09 1350 30 46 30 36.55


15-Apr-

09

30-Apr-

09 1350 71 72.1 28.2 31.85

INFOSYSTCH PUT (STRIKE PRICE: 1350) (SOURCE: nseindia.com)


65


Strike



6-Apr-

09

30-Apr-

09 1440 58.5 80 58.5 72.1


8-Apr-

09

30-Apr-

09 1440 90.15 102 67.8 68.15


9-Apr-

09

30-Apr-

09 1440 65.8 68.5 61 65.7


13-Apr-

09

30-Apr-

09 1440 81 89 69.9 79.95


15-Apr-

09

30-Apr-

09 1440 140 140 90 90

INFOSYSTCH PUT (STRIKE PRICE: 1440) (SOURCE: nseindia.com)


FUTSTK RELIANCE

6-Apr-

09

30-Apr-

09 1701 1725 1651.25 1677.25

FUTSTK RELIANCE

8-Apr-

09

30-Apr-

09 1630.3 1742.9 1613.65 1732.4

FUTSTK RELIANCE

9-Apr-

09

30-Apr-

09 1755.4 1776 1710 1743.45

FUTSTK RELIANCE

13-Apr-

09

30-Apr-

09 1755.5 1796 1729 1777.75

FUTSTK RELIANCE

15-Apr-

09

30-Apr-

09 1748 1844 1741 1833.6

RELIANCE FUTURE (SOURCE: nseindia.com)


66


Strike


OPTSTK RELIANCE CA

6-Apr-

09

30-Apr-

09 1650 134.95 134.95 76 94.65

OPTSTK RELIANCE CA

8-Apr-

09

30-Apr-

09 1650 60 136 59.5 129.75

OPTSTK RELIANCE CA

9-Apr-

09

30-Apr-

09 1650 132 160 123.9 131.2

OPTSTK RELIANCE CA

13-Apr-

09

30-Apr-

09 1650 126.25 172 126.25 161.9

OPTSTK RELIANCE CA

15-Apr-

09

30-Apr-

09 1650 170.5 219.9 164 208.4

RELIANCE CALL (STRIKE PRICE: 1650) (SOURCE: nseindia.com)


Strike


OPTSTK RELIANCE CA

6-Apr-

09

30-Apr-

09 1680 85 106 64 78.1

OPTSTK RELIANCE CA

8-Apr-

09

30-Apr-

09 1680 50 115 46.15 108.15

OPTSTK RELIANCE CA

9-Apr-

09

30-Apr-

09 1680 115 135 99 116.3

OPTSTK RELIANCE CA

13-Apr-

09

30-Apr-

09 1680 110 150 106.95 139

OPTSTK RELIANCE CA

15-Apr-

09

30-Apr-

09 1680 115 180 115 175



67


Strike


OPTSTK RELIANCE CA

6-Apr-

09

30-Apr-

09 1710 76 89 55.1 65.05

OPTSTK RELIANCE CA

8-Apr-

09

30-Apr-

09 1710 42 97 36.45 90.35

OPTSTK RELIANCE CA

9-Apr-

09

30-Apr-

09 1710 105 115 78.25 94

OPTSTK RELIANCE CA

13-Apr-

09

30-Apr-

09 1710 118 128 86 112.85

OPTSTK RELIANCE CA

15-Apr-

09

30-Apr-

09 1710 99 160 90 155.65



Strike


OPTSTK RELIANCE CA

6-Apr-

09

30-Apr-

09 1740 53 73 45 52.4

OPTSTK RELIANCE CA

8-Apr-

09

30-Apr-

09 1740 32 79.9 26 75.1

OPTSTK RELIANCE CA

9-Apr-

09

30-Apr-

09 1740 85 95 63 78.5

OPTSTK RELIANCE CA

13-Apr-

09

30-Apr-

09 1740 90 106 70 96.55

OPTSTK RELIANCE CA

15-Apr-

09

30-Apr-

09 1740 83 140 74.15 134.5



68


Strike


OPTSTK RELIANCE CA

9-Apr-

09

30-Apr-

09 1800 50 66.9 40.05 52

OPTSTK RELIANCE CA

13-Apr-

09

30-Apr-

09 1800 52.45 73.95 45 65.15

OPTSTK RELIANCE CA

15-Apr-

09

30-Apr-

09 1800 45 99.95 45 94.35



Strike


OPTSTK RELIANCE PA

6-Apr-

09

30-Apr-

09 1650 57.85 77.5 53 68.75

OPTSTK RELIANCE PA

8-Apr-

09

30-Apr-

09 1650 80 95.9 45 48.7

OPTSTK RELIANCE PA

9-Apr-

09

30-Apr-

09 1650 40 56.95 36.05 42.5

OPTSTK RELIANCE PA

13-Apr-

09

30-Apr-

09 1650 38 48.7 30.3 33.5

OPTSTK RELIANCE PA

15-Apr-

09

30-Apr-

09 1650 38 42 21 23.75

RELIANCE PUT (STRIKE PRICE: 1650) (SOURCE: nseindia.com)


69


Strike


OPTSTK RELIANCE PA

6-Apr-

09

30-Apr-

09 1740 90 128 90 113.7

OPTSTK RELIANCE PA

8-Apr-

09

30-Apr-

09 1740 115.2 115.2 77 83.15

OPTSTK RELIANCE PA

9-Apr-

09

30-Apr-

09 1740 75 92 61.15 77.4

OPTSTK RELIANCE PA

13-Apr-

09

30-Apr-

09 1740 70 84.2 53 60.4

OPTSTK RELIANCE PA

15-Apr-

09

30-Apr-

09 1740 74 74 39 41.45

RELIANCE PUT (STRIKE PRICE: 1740) (SOURCE: nseindia.com)


70

GLOSSARY

Technical Terms used in the Project:

Call Option: A call option gives the holder the right but not the obligation to buy

an asset by a certain date for a certain price.

Put Option: A put option gives the holder the right but not the obligation to sell an

asset by a certain date for a certain price.

Long Position: Long position in a derivatives contract means outstanding

purchase obligations in respect of a permitted derivatives contract at any point of

time.

Option Price/ Premium: Option price is the price which the option buyer pays to

the option seller. It is also referred to as the option premium.

Expiration Date: The date specified in the options contract is known as the

expiration date, the exercise date, the strike date or the maturity.

Strike Price: The price specified in the options contract is known as the strike price

or the exercise price.

Delta: Delta is the rate of change of option price with respect to the price of the

underlying asset. For example, the delta of a stock is 1. It is the slope of the curve

that relates the option price to the price of the underlying asset. Suppose the Delta

of a call option on a stock is 0.5. This means that when the stock price changes by

one, the option price changes by about 0.5, or 50% of the change in the stock price.


71

Gamma: Gamma is the rate of change of the option’s Delta with respect to the

price of the underlying asset. In other words, it is the second derivative of the

option price with respect to price of the underlying asset.

Theta: Theta of the portfolio of options is the rate of change of the value of the

portfolio with respect to the passage of time with all else remaining the same.

Theta is also referred to as the time decay with all else remaining the same.

Vega: The Vega of the portfolio of derivatives is the rate of change in the value of

the portfolio with respect to the volatility of the underlying asset. If Vega is high in

the absolute terms, the portfolio’s value is very sensitive to small changes in

volatility. If Vega is low in absolute terms, volatility changes have relatively little

impact on the value of the portfolio.

Rho: The Rho of a portfolio of option is the rate of change of the value of the

portfolio with respect to the interest rate. It measures the sensitivity of the value to

interest rates.

risk management in equity derivative market by ashish pugalia

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