A

PROJECT REPORT
ON

STUDY OF DERIVATIVES

(FUTURES AND OPTIONS)

AT

Vansh Capital

BY
Mahendrakumar Laxman Dantrao

UNDER THE GUIDANCE OF

Mrs. Aparna Jawalekar

SUBMITTED TO

SAVITRIBAI PHULE PULE UNIVERSITY OF PUNE

IN PARTIAL FUFILLMENT OF THE REQUIREMENTS

FOR THE AWARD OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

YEAR 2015 TO 17

FOR

INDIRA INSTITUTE OF MANAGEMENT

1
 CERTIFICATE

This is to certify that, Mr. Mahendrakumar Laxman Dantra, student of Indira Institute of
Management - Pune has successfully completed his project Titled Study of Derivatives
(Futures and Options) for the period from 17 June 2016 to 12 August 2016 in partial
fulfillment of Master in Business Administration (MBA) course.

Dr. Pandit Mali Mrs. Aparna Jawalekar

Director, MBA, Internal Project Guide
Indira Institute of Management, Pune Indira Institute of Management,Pune

2
 ACKNOWLEDGEMENT

It is with a sage sense of gratitude, I acknowledge the efforts of whole hosts of well-
wishers who have in some way or other contributed in their own special ways to the
success and completion of this summer internship project.

First of all, I express my sense of gratitude and indebtedness to Mr. Sarang Aherrao for
his unprecedented support and faith that I do the best and his valuable recommendation
and for accepting this project. I would also like to thank him for guiding at every step and
standing by us in difficult situations.

I sincerely express my thanks to my internal project guide Mrs. Smitha Papachan for his
valuable guidance and intellectual suggestions during this project.

I would also express my sincere gratitude towards all the executives who overlooked my
work and pushed me hard so that I could complete the targets assigned to me. I would
really like to thank Vivanta by Taj - Blue Diamond Company as a whole because the
whole idea about how a market research firm works was acquired by me during my stint of
2 months. It was really an enlightening experience. I would like to express my sincere
gratitude towards all the components of Vivanta by Taj - Blue Diamond which made the
internship journey an unforgettable one.

3
 DECLARATION

I, the undersigned, hereby declare that the Project Report entitled Study of Derivatives
(Futures and Options) written and submitted by me to the University of Pune, in
partial fulfilment of the requirements for the award of degree of Master of Business
Administration under the guidance Mrs. Aparna Jawalekar is my original work and the
conclusions drawn therein are based on the material collected by me.

Place: Pune Research Student Mahendrakumar Dantrao

Date:

4
 EXECUTIVE SUMMARY

Title of the Project:

Study of Derivatives (Futures and Options)

Need for the Study

The study has been conducted to acquire practical knowledge about the derivatives viz.,
Futures and Options, .

The study was done as a part of MBA curriculum and was done from 17 th of May to 12th of
August in the form of Summer Internship for the fulfilment of the requirement of MBA
degree.

Objective of the study

To calculate the risk and return of investment in futures and investment in options
To understand about the derivatives market
To analyze the role of futures and options in Indian financial system
To identifies the market trend and price movement based upon the open interest
changes.
To know why derivatives is considered safer than cash market.
To construct portfolio and analyses the risk return relationship.
To hedge the most profitable portfolio.

5
 ABSTRACT
The emergence of the market for derivative products, most notably

forwards, futures and options, can be traced back to the willingness of risk-averse

economic agents to guard themselves against uncertainties arising out of fluctuations in

asset prices. By their very nature, the financial markets are marked by a very high

degree of volatility. Through the use of derivative products, it is possible to partially or

fully transfer price risks by locking-in asset prices. As instruments of risk management,

these generally do not influence the fluctuations in the underlying asset prices.

However, by locking-in asset prices, derivative products minimize the impact of

fluctuations in asset prices on the profitability and cash flow situation of risk-averse

investors. Derivative products initially emerged as hedging devices against fluctuations

in commodity prices, and commodity-linked derivatives remained the sole form of such

products for almost three hundred years. Financial derivatives came into spotlight in the

post-1970 period due to growing instability in the financial markets. However, since

their emergence, these products have become very popular and by 1990s, they
6
accounted for about two-thirds of total transactions in derivative products. In recent

years, the market for financial derivatives has grown tremendously in terms of variety

of instruments available, their complexity and also turnover. In the class of equity

derivatives the world over, futures and options on stock indices have gained more

popularity than on individual stocks, especially among institutional investors, who are

major users of index-linked derivatives. Even small investors find these useful due to

high correlation of the popular indexes with various portfolios and ease of use.

This project deals mainly with futures and options, the terminologies involved,

difference between them , their eligibility criteria, how are they traded, how futures

and options are used for hedging, settlement process strategies, and the softwares

used.

TABLE OF CONTENT
S.NO CONTENT Pg,no

1. INTRODUCTION 7-11
1.1 INTRODUCTION
1.2 SCOPE OF THE STUDY
1.3 STATEMENT OF THE PROBLEMS
1.4 OBJECTIVES OF THE STUDY
1.6 LIMITATIONS
1.6 RESEARCH METHODOLOGY
2. LITERATURE REVIEW 12-42
2.1 INTRODUCTION OF DERIVATIVES
2.2 HISTORICAL VIEW OF FUTURES & OPTIONS
2.3 FUTURES
2.4 OPTIONS
2.5 ELIGIBILITY CRITERIA FOR SECURITIES TRADED
2.6 TRADING MECHANISM OF FUTURES & OPTIONS
3. COMPANY PROFILE 43-54
4. DATA ANALYSIS & INTERPRETATION 55-65
7
 4.1 ANALYSIS OF FUTURE
4.2 RELATION OF FP AND WITH SP
4.3 ANALYSIS OF OPTIONS
5. SUMMARY AND CONCLUSION 66-69
5.1 RESULTS & DISCUSSIONS
5.2 SUGGESTIONS
5.3 CONCLUSION
6. BIBILOGRAPHY

//

LIST OF TABLES
S.NO CONTENTS Pg. No
1. T1-Data for FUTIDX-NIFTY from 01-07-2016 to 28-07-2016 43
2. T2-- Data for FUTIDX-NIFTY from 01-08-2016 to 25-08-2016 44
LIST OF FIGURES
S.NO CONTENTS Pg. No
1. MAJOR PLAYERS IN DERIVATIVE MARKET: 15
2. PAY-OFF FOR A BUYER OF FUTURES 22
3. PAY-OFF FOR A SELLER OF FUTURES 23
4. PAY-OFF PROFILE FOR BUYER OF A CALL OPTION 28
5. PAY-OFF PROFILE FOR SELLER OF A CALL OPTION 29
6. PAY-OFF PROFILE FOR BUYER OF A PUT OPTION 31
7. PAY-OFF PROFILE FOR SELLER OF A PUT OPTION 32

8
 CHAPTER-1
INTRODUCTION

9
1.1 INTRODUCTION

Derivatives are a wide group of financial securities defined on the basis of other

financial securities, i.e., the price of a derivative is dependent on the price of another

security, called the underlying. These underlying securities are usually shares or bonds,

although they can be various other financial products, even other derivatives. As a quick

example, lets consider the derivative called a call option, defined on a common share.

The buyer of such a product gets the right to buy the common share by a future date. But

she might not want to do sotheres no obligation to buy it, just the choice, the option.

Lets now flesh out some of the details. The price at which she can buy the underlying is

called the strike price, and the date after which this option expires is called the strike date.

In other words, the buyer of a call option has the right, but not the obligation to take a long

position in the underlying at the strike price on or before the strike date. Call options are

further classified as being European, if this right can only be exercised on the strike date

and American, if it can be exercised any time up and until the strike date.

Derivatives are amongst the widely traded financial securities in the world.

Turnover in the futures and options markets are usually many times the cash (underlying)

markets. Our treatment of derivatives in this module is somewhat limited: we provide a

short introduction about of the major types of derivatives traded in the markets and their

pricing.

Financial derivatives came into spotlight in the year 1970 period due to

growing instability in the financial markets. However since their emergence, these

10
accounted for about two-third of totals transactions in derivatives products. In recent years,

the market for financial derivatives has grown tremendously in terms of variety of

instruments available, there complexity & also turn over. In the class of equity derivatives

Futures & options on stock also turn over. In the class of equity derivatives, futures &

options on stock indicates gained more popularly than individual stocks.

1.2 SCOPE OF THE STUDY

The scope of the study is limited to DERIVATIVES with the special reference to

Indian context and the National stock exchange has been taken as a representative

sample for the study. The study includes futures and options.
My analysis part is limited to selecting the investment option it means that whether

we have to invest cash market or derivatives market.

I have taken only NIFTY JULY series to analyze and interpret the results.
Based upon four criterias only open interest is evaluated for analyzing the trend of

market as well as price movement.

The study is not Based on the international perspective of derivatives markets,

which exists in NASDAQ, CBOT etc.

This study mainly covers the area of hedging and speculation. The main aim of the

study is to prove how risks in investing in equity shares can be reduced and how to

make maximum return to the other investment.

1.3 STATEMENT OF THE PROBLEM

The main problem in the derivatives is we cant able to decide that time and

derivative product which is more risky and return depend upon the time and product only

we can earn more returns with taking more risk. In this following project I came to know

that based upon some valuations and time conditions we can easily identify that which

product is more efficient for earning more returns. In this research I used only two
11
derivative products they are FUTURES and OPTIONS. Another one is OPEN INTEREST

concept it is very new to market. This additional work proposes based upon open interest

and volume we can tell the when the market is bullish as well as bearish and identifies that

price movements easily when they are going to rise and when they are coming fall depends

upon price volume changes.

1.4 OBJECTIVES OF THE STUDY

The objectives for my research are as below

To calculate the risk and return of investment in futures and investment in options
To identifies the market trend and price movement based upon the open interest

changes
To analyze the role of futures and options in Indian financial system
To understand about the derivatives market.
To know why derivatives is considered safer than cash market.
To construct portfolio and analyses the risk return relationship.
To hedge the most profitable portfolio.

1.5 LIMITATIONS

Share market is so much volatile and it is difficult to forecast any thing about it

whether you trade through online or offline

The time available to conduct the study was only 2 months. It being a wide topic

had a limited time.

12
1.6 RESEARCH METHODOLOGY

Research Methodology is a systematic procedure of collecting information in order

to analyse and verify a phenomenon. the collection of information is done in two principle

sources. They are as follows

1. Primary Data
2. Secondary Data

Primary Data:

It is the information collected directly without any references. In this study it is

gathered with personal observation in trading times

Secondary Data:

The secondary data was collected from already published sources such as, NSE

websites, internal records, reference from text books and journal relating to derivatives.

The data collection includes:

a) Collection of required data from NSE and BSE websites

b) Reference from text books and journals relating to Indian stock market system

and financial derivatives.

13
 CHAPTER-2
LITERATURE REVIEW

14
CONCEPTUAL AND THEORITICAL REVIEW

2.1 INTRODUCTION OF DERIVATIVES

DEFINITION

Derivative is a product whose value is derived from the value of one or more basic

variables, called bases (underlying asset, index, or reference rate), in a contractual manner.

The underlying asset can be equity, forex, commodity or any other asset. For example,

wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a

change in prices by that date. Such a transaction is an example of a derivative. The price of

this derivative is driven by the spot price of wheat which is the "underlying".

FACTORS DRIVING THE GROWTH OF DERIVATIVES

Over the last three decades, the derivatives market has seen a phenomenal growth. A

large variety of derivative contracts have been launched at exchanges across the world.

Some of the factors driving the growth of financial derivatives are:

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

15
5. Innovations in the derivatives markets, which optimally combine the risk 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.

2.2 HISTORICAL VIEW OF FUTURES AND OPTIONS

Early forward contracts in the US addressed merchants' concerns about ensuring

that there were buyers and sellers for commodities. However 'credit risk" remained a

serious problem. To deal with this problem, a group of Chicago businessmen formed the

Chicago Board of Trade (CBOT) in 1848. The primary intention of the CBOT was to

provide a centralized location known in advance for buyers and sellers to negotiate forward

contracts. In 1865, the CBOT went one step further and listed the first 'exchange traded"

derivatives contract in the US, these contracts were called 'futures contracts". In 1919,

Chicago Butter and Egg Board, a spin-off of CBOT, was reorganized to allow futures

trading. Its name was changed to Chicago Mercantile Exchange (CME). The CBOT and

the CME remain the two largest organized futures exchanges, indeed the two largest

"financial" exchanges of any kind in the world today. The first stock index futures contract

was traded at Kansas City Board of Trade. Currently the most popular stock index futures

contract in the world is based on S&P 500 index, traded on Chicago Mercantile Exchange.

Index futures, futures on T-bills and Euro-Dollar futures are the three most popular futures

contracts traded today. Other popular international exchanges that trade derivatives are

LIFFE in England, DTB in Germany, SGX in Singapore, TIFFE in Japan, MATIF in

France, Euro ex etc.

INDEX FUTURES (JUNE 12, 2000)

16
 INDEX OPTIONS (JUNE 4, 2001)

STOCK OPTIONS (JULY 2, 2001)

STOCK FUTURES (NOVEMBER 9, 2001)

Flow of futures and options in NSE

Risks involved in Derivatives:

Derivatives are used to separate risks from traditional instruments and transfer these

risks to parties willing to bear these risks. The fundamental risks involved in derivative

business includes

A. Credit Risk: This is the risk of failure of a counterpart to perform its obligation as

per the contract. Also known as default or counterpart risk, it differs with different

instruments.

B. Market Risk: Market risk is a risk of financial loss as result of adverse

movements of prices of the underlying asset/instrument.

C. Liquidity Risk: The inability of a firm to arrange a transaction at prevailing

market prices is termed as liquidity risk. A firm faces two types of liquidity

risks:

Related to liquidity of separate products.

Related to the funding of activities of the firm including derivatives.

17
 D. Legal Risk: Derivatives cut across judicial boundaries, therefore the legal aspects

associated with

The deal should be looked into carefully.

MAJOR PLAYERS IN DERIVATIVE MARKET:

There are three major players in their derivatives trading.

1. Hedgers.

2. Speculators.

3. Arbitrageurs.

Hedgers: The party, which manages the risk, is known as Hedger. Hedgers seek to

protect themselves against price changes in a commodity in which they have an interest.

Speculators: They are traders with a view and objective of making profits. They are

willing to take risks and they but upon whether the markets would go up or come down.

Arbitrageurs: Risk less profit making is the prime goal of arbitrageurs. They could be

making money even with out putting their own money in, and such opportunities often

come up in the market but last for very short time frames. They are specialized in making

purchases and sales in different markets at the same time and profits by the difference in

prices between the two centres.

18
 MAJOR PLAYERS
IN
DERIVATIVE
MARKET

HEDGERS SPECULATORS ARBITRAGEURS

Fig 1: MAJOR PLAYERS IN DERIVATIVE MARKET:

Contract Periods:

At any point of time there will be always be available nearly 3months contract

periods in Indian Markets.

These were

19
 1) Near Month

2) Next Month

3) Far Month

For example in the month of September 2008 one can enter into September futures

contract or October futures contract or November futures contract. The last Thursday of

the month specified in the contract shall be the final settlement date for the contract at both

NSE as well as BSE It is also know as Expiry Date.

Settlement:

The settlement of all derivative contracts is in cash mode. There is daily as well as

final settlement. Outstanding positions of a contract can remain open till the last Thursday

of the month. As long as the position is open, the same will be marked to market at the

daily settlement price, the difference will be credited or debited accordingly and the

position shall be brought forward to the next day at the daily settlement price. Any

position which remains open at the end of the final settlement day (i.e. last Thursday) shall

closed out by the exchanged at the final settlement price which will be the closing spot

value of the underlying asset.

Margins:

There are two types of margins collected on the open position, viz., initial margin

which is collected upfront which is named as SPAN MARGIN and mark to market

margin, which is to be paid on next day. As per SEBI guidelines it is mandatory for clients

to give margins, fail in which the outstanding positions or required to be closed out.

Members of F & O segment:

20
 There are three types of members in the futures and options segment. They are

trading members, trading cum clearing member and professional clearing members.

Trading members are the members of the derivatives segment and carrying on the

transaction on the respective exchange.

The clearing members are the members of the clearing corporation who deal with

payments of margin as well as final settlements.

The professional clearing member is a clearing member who is not a trading

member. Typically, banks and custodians become professional clearing members.

It is mandatory for every member of the derivatives segment to have approved

users who passed SEBI approved derivatives certification test, to spread awareness

among investors.

2.3 FUTURES
A futures contract is an agreement between two parties to buy or sell an asset at a

certain time in the future at a certain price. The futures contracts are standardized and

exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies

certain standard features of the contract. It is a standardized contract with standard

underlying instrument, a standard quantity and quality of the underlying instrument that

can be delivered, (or which can be used for reference purposes in settlement) and a

standard timing of such settlement.

The standardized items in a futures contract are:

Quantity of the underlying

Quality of the underlying
The date and the month of delivery
21
 The units of price quotation and minimum price change
Location of settlement

Futures contracts in physical commodities such as wheat, cotton, gold, silver, cattle,

etc. have existed for a long time. Futures in financial assets, currencies, and

interest bearing instruments like treasury bills and bonds and other innovations like

futures contracts in stock indexes are relatively new developments.

The futures market described as continuous auction markets and exchanges

providing the latest information about supply and demand with respect to

individual commodities, financial instruments and currencies, etc

Futures exchanges are where buyers and sellers of an expanding list of

commodities; financial instruments and currencies come together to trade. Trading

has also been initiated in options on futures contracts. Thus, option buyers

participate in futures markets with different risk. The option buyer knows the exact

risk, which is unknown to the futures trader.

Future Contract

Suppose you decide to buy a certain quantity of goods. As the buyer, you

enter into an agreement with the company to receive a specific quantity of

goods at a certain price every month for the next year. This contract made

with the company is similar to a futures contract, in that you have agreed to

receive a product at a future date, with the price and terms for delivery already

set. You have secured your price for now and the next year - even if the price of

goods rises during that time. By entering into this agreement with the company,

you have reduced your risk of higher prices.

22
 So, a futures contract is an agreement between two parties: a short position - the

party who agrees to deliver a commodity - and a long position - the party who

agrees to receive a commodity. In every futures contract, everything is specified:

the quantity and quality of the commodity, the specific price per unit, and the

date and method of delivery. The price of a futures contract is represented by

the agreed-upon price of the underlying commodity or financial instrument that

will be delivered in the future.

Features of Futures Contracts:

The principal features of the contract are as fallows.

Organized Exchanges: Unlike forward contracts which are traded in an over the

- counter market, futures are traded on organized exchanges with a designated

physical location where trading takes place. This provides a ready, liquid market

which futures can be bought and sold at any time like in a stock market.

Standardization: In the case of forward contracts the amount of commodities to

be delivered and the maturity date are negotiated between the buyer and seller and

can be tailor made to buyers requirement. In a futures contract both these are

standardized by the exchange on which the contract is traded.

Clearing House: The exchange acts a clearinghouse to all contracts struck on the

trading floor. For instance a contract is struck between capital A and B. upon

entering into the records of the exchange, this is immediately replaced by two

contracts, one between A and the clearing house and another between B and the

clearing house. In other words the exchange interposes itself in every contract and

deal, where it is a buyer to seller, and seller to buyer. The advantage of this is that

23
 A and B do not have to undertake any exercise to investigate each others credit

worthiness. It also guarantees financial integrity of the market. The enforce the

delivery for the delivery of contracts held for until maturity and protects itself from

default risk by imposing margin requirements on traders and enforcing this through

a system called marking to market.

Actual delivery is rare: In most of the forward contracts, the commodity is

actually delivered by the seller and is accepted by the buyer. Forward contracts are

entered into for acquiring or disposing of a commodity in the future for a gain at a

price known today. In contrast to this, in most futures markets, actual delivery

takes place in less than one present of the contracts traded. Futures are used as a

device to hedge against price risk and as a way of betting against price movements

rather than a means of physical acquisition of the underlying asset. To achieve, this

most of the contracts entered into are nullified by the matching contract in the

opposite direction before maturity of the first.

Margins: In order to avoid unhealthy competition among clearing members in

reducing margins to attract customers, a mandatory minimum margins are obtained

by the members from the customers. Such a stop insures the market against serious

liquidity crises arising out of possible defaults by the clearing members. The

members collect margins from their clients has may be stipulated by the stock

exchanges from time to time and pass the margins to the clearing house on the net

basis i.e. at a stipulated percentage of the net purchase and sale position.

FUTURES TERMINOLOGY

Spot price: The price at which an asset trades in the spot market.

24
Futures price: The price at which the futures contract trades in the futures market.

Contract cycle: The period over which a contract trades. The index futures contracts on

the NSE have one- month, two-months and three months expiry cycles which expire on the

last Thursday of the month. Thus a January expiration contract expires on the last Thursday

of January and a February expiration contract ceases trading on the last Thursday of

February. On the Friday following the last Thursday, a new contract having a three- month

expiry is introduced for trading.

Expiry date: It is the date specified in the futures contract. This is the last day on which

the contract will be traded, at the end of which it will cease to exist.

Contract size: The amount of asset that has to be delivered under one contract. Also called

as lot size.

Basis: In the context of financial futures, basis can be defined as the futures price minus

the spot price. There will be a different basis for each delivery month for each contract. In

a normal market, basis will be positive. This reflects that futures prices normally exceed

spot prices.

Cost of carry: The relationship between futures prices and spot prices can be summarized

in terms of what is known as the cost of carry. This measures the storage cost plus the

interest that is paid to finance the asset less the income earned on the asset.

Initial margin: The amount that must be deposited in the margin account at the time a

futures contract is first entered into is known as initial margin.

Marking-to-market: In the futures market, at the end of each trading day, the margin

account is adjusted to reflect the investor's gain or loss depending upon the futures closing

price. This is called marking-to-market.

Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure

that the balance in the margin account never becomes negative. If the balance in the margin
25
 account falls below the maintenance margin, the investor receives a margin call and is

expected to top up the margin account to the initial margin level before trading commences

on the next day.

TYPES OF FUTURES

On the basis of the underlying asset they derive, the futures are divided into two types:

Stock Futures

Index Futures

PARTIES IN THE FUTURES CONTRACT

There are two parties in a futures contract, the buyers and the seller. The buyer of

the futures contract is one who is LONG on the futures contract and the seller of the

futures contract is who is SHORT on the futures contract.

The pay-off for the buyers and the seller of the futures of the contracts are as follows:

Fig-2: PAY-OFF FOR A BUYER OF FUTURES

26
 P
PROFIT

E2
F E1
LOSS

Figure 3.2

CASE 1:- The buyers bought the futures contract at (F); if the futures

Price Goes to E1 then the buyer gets the profit of (FP).

CASE 2:- The buyers gets loss when the futures price less then (F); if

The Futures price goes to E2 then the buyer the loss of (FL).

Fig: PAY-OFF FOR A SELLER OF FUTURES

27
 P
PROFIT

E2
E1 F

LOSS

Figure 3.3

F = FUTURES PRICE

E1, E2 = SATTLEMENT PRICE

CASE 1:- The seller sold the future contract at (F); if the future goes to

E1 Then the seller gets the profit of (FP).

CASE 2:- The seller gets loss when the future price goes greater than (F);

If the future price goes to E2 then the seller get the loss of (FL).

HOW THE FUTURE MARKET WORKS

The futures market is a centralized marketplace for buyers and sellers from

around the world who meet and enter into futures contracts. Pricing can be based on
28
 an open outcry system, or bids and offers can be matched electronically. The futures

contract will state the price that will be paid and the date of delivery. Almost all

futures contracts end without the actual physical delivery of the commodity.

2.4 OPTIONS

INTRODUCTION TO OPTIONS

In this section, we look at the next derivative product to be traded on the NSE,

namely options. Options are fundamentally different from forward and futures contracts.

An option gives the holder of the option the right to do something. The holder does not

have to exercise this right. In contrast, in a forward or futures contract, the two parties

have committed themselves to doing something. Whereas it costs nothing (except margin

requirement) to enter into a futures contracts, the purchase of an option requires as up-front

payment.

DEFINITION

Options are of two types- calls and puts. Calls give the buyer the right but not the

obligation to buy a given quantity of the underlying asset, at a given price on or before a

given future date. Puts give the buyers the right, but not the obligation to sell a given

quantity of the underlying asset at a given price on or before a given date.

PROPERTIES OF OPTION

29
 Options have several unique properties that set them apart from other securities.

The following are the properties of option:

Limited Loss

High leverages potential

Limited Life

PARTIES IN AN OPTION CONTRACT

There are two participants in Option Contract.

Buyer/Holder/Owner of an Option:

The Buyer of an Option is the one who by paying the option premium buys the

right but not the obligation to exercise his option on the seller/writer.

Seller/writer of an Option:

The writer of a call/put option is the one who receives the option premium and is

thereby obliged to sell/buy the asset if the buyer exercises on him.

Characteristics of Options:

The following are the main characteristics of options:

1. Options holders do not receive any dividend or interest.

2. Options only capital gains.

3. Options holder can enjoy a tax advantage.

4. Options holders are traded an O.T.C and in all recognized stock exchanges.

5. Options holders can control their rights on the underlying asset.

6. Options create the possibility of gaining a windfall profit.

30
 7. Options holders can enjoy a much wider risk-return combinations.

8. Options can reduce the total portfolio transaction costs.

9. Options enable with the investors to gain a better return with a limited amount of

investment.

TYPES OF OPTIONS

The Options are classified into various types on the basis of various variables. The

following are the various types of options.

1. On the basis of the underlying asset:

On the basis of the underlying asset the option are divided in to two types:

Index options:

These options have the index as the underlying. Some options are European

while others are American. Like index futures contracts, index options contracts are also

cash settled.

Stock options:

Stock Options are options on individual stocks. Options currently trade on over

500 stocks in the United States. A contract gives the holder the right to buy or sell shares

at the specified price.

2. On the basis of the market movements :

On the basis of the market movements the option are divided into two types. They

are:

Call Option:

31
A call Option gives the holder the right but not the obligation to buy an asset by a certain

date for a certain price. It is brought by an investor when he seems that the stock price

moves upwards.

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. It is bought by an investor when he seems that the stock price

moves downwards.

3. On the basis of exercise of option:

On the basis of the exercise of the Option, the options are classified into two Categories.

American Option:

American options are options that can be exercised at any time up to the expiration date.

Most exchange traded options are American.

European Option:

European options are options that can be exercised only on the expiration date itself.

European options are easier to analyse than American options, and properties of an

American option are frequently deduced from those of its European counterpart.

32
 PAY-OFF PROFILE FOR BUYER OF A CALL OPTION

The Pay-off of a buyer options depends on a spot price of an underlying asset. The

following graph shows the pay-off of buyers of a call option.

PROFIT
R

ITM

ATM 1
E

OTM

E 2 LOSS P

Figure 3.4

33
 S= Strike price ITM = In the Money

SP = loss ATM = At the Money

E1 = Spot price 1 OTM = Out of the Money

E2 = Spot price 2

SR = Profit at spot price E1

CASE 1: (Spot Price > Strike price)

As the Spot price (E1) of the underlying asset is more than strike price (S).

The buyer gets profit of (SR), if price increases more than E 1 then profit also increase more

than (SR)

CASE 2: (Spot Price < Strike Price)

As a spot price (E2) of the underlying asset is less than strike price (S)

The buyer gets loss of (SP); if price goes down less than E 2 then also his loss is limited to

his premium (SP)

PAY-OFF PROFILE FOR SELLER OF A CALL OPTION

The pay-off of seller of the call option depends on the spot price of the underlying asset.

The following graph shows the pay-off of seller of a call option:

34
 PROFIT

P
ITM ATM
2
E
1
E
S
OTM

LOSS

Figure 3.5

S= Strike price ITM = In the Money

SP = Premium / profit ATM = At The money

E1 = Spot Price 1 OTM = Out of the Money

E2 = Spot Price 2

SR = loss at spot price E2

CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying is less than

strike price (S). The seller gets the profit of (SP), if the price decreases less than E1 then

also profit of the seller does not exceed (SP).

CASE 2: (Spot price > Strike price)

35
As the spot price (E2) of the underlying asset is more than strike price (S) the Seller gets

loss of (SR), if price goes more than E2 then the loss of the seller also increase more than

(SR).

PAY-OFF PROFILE FOR BUYER OF A PUT OPTION

The Pay-off of the buyer of the option depends on the spot price of the underlying asset.

The following graph shows the pay-off of the buyer of a call option.

36
 PROFIT
R

ITM
S
E 2
E1 ATM
OTM

P LOSS

Figure 3.6

S = Strike price ITM = In the Money

SP = Premium / loss ATM = At the Money

E1 = Spot price 1 OTM = Out of the Money

E2 = Spot price 2

SR = Profit at spot price E1

CASE 1: (Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S). The buyer gets

the profit (SR), if price decreases less than E1 then profit also increases more than (SR).

CASE 2: (Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S),

37
The buyer gets loss of (SP), if price goes more than E 2 than the loss of the buyer is limited

to his premium (SP).

PAY-OFF PROFILE FOR SELLER OF A PUT OPTION

The pay-off of a seller of the option depends on the spot price of the underlying asset. The

following graph shows the pay-off of seller of a put option.

PROFIT
P
ITM

E 1 ATM

E 2
S
OTM

LOSS

Figure 3.7

S = Strike price ITM = In the Money

SP = Premium/profit ATM = At the Money

E1 = Spot price 1 OTM = Out of the Money

E2 = Spot price 2

SR = Loss at spot price E1

38
CASE 1: (Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S), the seller gets the

loss of (SR), if price decreases less than E1 than the loss also increases more than (SR).

CASE 2: (Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S), the seller gets

profit of (SP), of price goes more than E 2 than the profit of seller is limited to his premium

(SP).

FACTORS AFFECTING THE PRICE OF AN OPTION

The following are the various factors that affect the price of an option they are:

Stock Price:

The pay-off from a call option is an amount by which the stock price exceeds the

strike price. Call options therefore become more valuable as the stock price increases and

vice versa. The pay-off from a put option is the amount; by which the strike price exceeds

the stock price. Put options therefore become more valuable as the stock price increases

and vice versa.

Strike price:

In case of a call, as a strike price increases, the stock price has to make a larger

upward move for the option to go in-the money. Therefore, for a call, as the strike price

increases option becomes less valuable and as strike price decreases, option become more

valuable

39
 Time to expiration:

Both put and call American options become more valuable as a time to expiration

increases.

Volatility:

The volatility of a stock price is measured of uncertain about future stock price

movements. As volatility increases the chance that the stock will do very well or very poor

increases. The value of both calls and puts therefore increases as volatility increase.

Risk- free interest rate:

The put option prices decline as the risk-free rate increases where as the price of

call always increases as the risk-free interest rate increases.

Dividends:

Dividends have the effect of reducing the stock price on the X- dividend rate. This

has a negative effect on the value of call options and a positive effect on the value of put

options.

OPTIONS TERMINOLOGY

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:

40
 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 option contract is known as the strike price or the

exercise price.

Intrinsic value and time value for calls:

In the case of a call, intrinsic value is the amount by which the underlying futures

price exceeds the strike price:

Futures Price Strike Price = Intrinsic Value

(must be positive or 0)

Example: June CME Live Cattle futures are trading at 82.50 cents/lb. and the June 80

CME Live Cattle call option is trading at 3.50 cents/lb. What are the time value and

intrinsic value components of the premium?

Futures Price Strike Price = Intrinsic Value

82.50 80.00 = 2.50

Time value represents the amount option traders are willing to pay over intrinsic value,

given the amount of time left to expiration for the futures to advance in the case of

calls, or decline in the case of puts.

Options Premium Intrinsic Value = Time Value

3.50 2.50 = 1.00

Time Value + Intrinsic Value = Premium

1.00 + 2.50 = 3.50

41
Intrinsic value and time value for puts:

In the case of a put, intrinsic value is the amount by which the underlying futures price is

below the strike price:

Intrinsic Value = Strike Price Futures Price (must be positive or 0)

Time Value = Put Option Premium Intrinsic Value

Put Option Premium = Put Time Value + Put Intrinsic Value

Example: What are the time value and intrinsic value of a CME Eurodollar 95.00 put if

the underlying futures are trading at 94.98 and the option premium is 0.03?

Strike Price Futures Price = Intrinsic Value

95.00 94.98 = 0.02

There are 0.02 points of intrinsic value.

Options Premium Intrinsic Value = Time Value

0.03 0.02 = 0.01

2.5 ELIGIBILITY CRITERIA FOR SECURITIES/INDICES TRADED

IN F&O
Eligibility criteria of stocks

1. The stock is chosen from amongst the top 500 stocks in terms of average daily

market capitalization and average daily traded value in 206 the previous six months

on a rolling basis.
2. The stock's median quarter-sigma order size over the last six months should be not

less than Rs. 1 lakh. For this purpose, a stock's quarter sigma order size should

mean the order size (in value terms) required to cause a change in the stock price

equal to one-quarter of a standard deviation.

3. The market wide position limit in the stock should not be less than Rs.50 crore. The

market wide position limit (number of shares) is valued taking the closing prices of

stocks in the underlying cash market on the date of expiry of contract in the month.

42
 The market wide position limit of open position (in terms of the number of

underlying stock) on futures and option contracts on a particular underlying stock

should be lower of:- 20% of the number of shares held by non-promoters in the

relevant underlying security i.e. free-float holding.

4. If an existing security fails to meet the eligibility criteria for three months

consecutively then no fresh month contract will be issued on that security.

5. However, the existing unexpired contracts can be permitted to trade till expiry and

new strikes can also be introduced in the existing contract months.

6. For unlisted companies coming out with initial public offering, if the net public

offer is Rs.500 crores or more, then the exchange may consider introducing stock

options and stock futures on such stocks at the time of its listing in the cash market.

Eligibility criteria of indices

The exchange may consider introducing derivative contracts on an index if the

stocks contributing to 80% weightage of the index are individually eligible for derivative

trading. However, no single ineligible stocks in the index should have a weightage of more

than 5% in the index. The above criteria is applied every month, if the index fails to meet

the eligibility criteria for three months consecutively, then no fresh month contract would

be issued on that index, However, the existing unexpired contacts will be permitted to trade

till expiry and new strikes can also be introduced in the existing contracts.

2.6 TRADING MECHANISM OF FUTURES AND OPTIONS

The futures and options trading system of NSE, called NEAT-F&O trading system,

provides a fully automated screen-based trading for Index futures &options and Stock

futures & options on a nationwide basis and an online monitoring and surveillance

mechanism. It supports an anonymous order driven market which provides complete

transparency of trading operations and operates on strict price-time priority. It is similar to

that of trading of equities in the Cash Market (CM) segment. The NEAT-F&O trading

43
system is accessed by two types of users. The Trading Members (TM) have access to

functions such as order entry, order matching, order and trade management. It provides

tremendous flexibility to users in terms of kinds of orders that can be placed on the system.

Various conditions like Immediate or Cancel, Limit/Market price, Stop loss, etc. can be

built into an order. The Clearing Members (CM) use the trader workstation for the purpose

of monitoring the trading member(s) for whom they clear the trades. Additionally, they can

enter and set limits to positions, which a trading member can take.

PRICING FUTURES

Forwards/ futures contract are priced using the cost of carry model. The cost of

carry model calculates the fair value of futures contract based on the current spot price of

the underlying asset. The formula used for pricing futures is given below:

Futures Price = Spot price * [1+ rf*(x/365) d]

Where,

rf = Risk free rate

d Dividend

x = number of days to expiry.

Example: Wipro Spot = 653

Rf 8.35%

x = 30

d=0

Given this, the futures should be trading at

44
Futures Price = 653*(1+8.35 %( 30/365)) 0

= 658

The presence of arbitrageurs would force the price to equal the fair value of the asset. If the

futures price is less than the fair value, one can profit by holding a long position in the

futures and a short position in the underlying. Alternatively, if the futures price is more

than the fair value, there is a scope to make a profit by holding a short position in the

futures and a long position in the underlying. The increase in demand/ supply of the futures

(and spot) contracts will force the futures price to equal the fair value of the asset.

PRICING OPTIONS

Our brief treatment of options in this module initially looks at pay-off diagrams,

which chart the price of the option with changes in the price of the underlying and then

describes how call and option prices are related using put-call parity. We then briefly

describe the celebrated Black-Scholes formula to price a European option.

Payoffs from an option contract refer to the value of the option contract for the parties

(buyer and seller) on the date the option is exercised. For the sake of simplicity, we do not

consider the initial premium amount while calculating the option payoffs. In case of call

options, the option buyer would exercise the option only if the market price on the date of

exercise is more than the strike price of the option contract. Otherwise, the option is

worthless since it will expire without being exercised. Similarly, a put option buyer would

exercise her right if the market price is lower than the exercise price.

The payoff of a call option buyer at expiration is:

Max [(Market price of the share Exercise Price), 0]

45
The following figures shows the payoff diagram for call options buyer and seller (assumed

exercise price is 100)

The payoff for a buyer of a put option at expiration is:

Max [(Exercise price Market price of the share), 0]

The payoff diagram for put options buyer and seller (assumed exercise price is 100)

CHAPTER-3
46
 COMPANY PROFILE

INTRODUCTION

Vansh Capital is renowned organization providing investment & trading

advisory in Indian capital market since 2004.It also provides training and education for

knowing Stock Market, trading, different instruments of investments. It also provide

trading advisory to its clients on the matter of investments in different types of securities.

47
Services Provided :

Short Term Trading Calls On Shares ( 1 to 3 Months)

Long Term Investment Calls On Equity, Mutual Fund, Debenture, IPO &

Commodity
Recommendations By SMS, Fundamental & Technical Reports On Email
Free Quarterly Investment Guidance Seminar
Market Hours Guidance
Weekly Levels On Nifty
Investment & Trading Advisory
Demat Account Opening

48
 CHAPTER-4
DATA ANALYSIS
&
INTERPRETATION

4.1 ANALYSIS OF FUTURES

LONG FUTURES

When the market is in bullish we will take futures as long it means that when the

market is going up future price is also going up in this way we will gain returns on that

particular future. The calculation of return on future is as below.

Example

The following table consists the future values of NIFTY from 01- 07-16 to 28-07-16

By observing the table the future values of NIFTY is gradually increasing.If we take long

futures it will be beneficial.

49
T1--Data for FUTIDX-NIFTY from 01-07-2016 to 28-07-2016:

Symb
ol Date Expiry Open High Low Close
8355.
NIFTY 01-Jul-16 28-Jul-16 8310 8378 8310 15
8385. 8387.
NIFTY 04-Jul-16 28-Jul-16 1 8415 8376 35
8382.
NIFTY 05-Jul-16 28-Jul-16 8381 5 8342 8354
8347. 8330. 8358.
NIFTY 07-Jul-16 28-Jul-16 7 8392 05 3
8295. 8336.
NIFTY 08-Jul-16 28-Jul-16 8350 8353 05 45
8432. 8422. 8489.
NIFTY 11-Jul-16 28-Jul-16 75 8496 35 4
8512. 8534. 8528.
NIFTY 12-Jul-16 28-Jul-16 1 55 8492 75
8539. 8501. 8520.
NIFTY 13-Jul-16 28-Jul-16 95 8545 1 05
8509. 8576.
NIFTY 14-Jul-16 28-Jul-16 8521 8584 55 55
8589. 8554.
NIFTY 15-Jul-16 28-Jul-16 9 8605 8525 85
8571. 8520.
NIFTY 18-Jul-16 28-Jul-16 5 8604 8510 5
8485. 8540.
NIFTY 19-Jul-16 28-Jul-16 8525 8555 6 45
8549. 8591. 8542. 8584.
NIFTY 20-Jul-16 28-Jul-16 9 65 5 15
8511. 8519.
NIFTY 21-Jul-16 28-Jul-16 8888 8888 7 75
8527. 8563. 8500. 8554.
NIFTY 22-Jul-16 28-Jul-16 15 9 5 3
8645. 8530. 8639.
NIFTY 25-Jul-16 28-Jul-16 8545 6 75 7
8602. 8652. 8576. 8592.
NIFTY 26-Jul-16 28-Jul-16 1 05 55 85
8602. 8667. 8566. 8614.
NIFTY 27-Jul-16 28-Jul-16 1 5 05 75
8625. 8667. 8615. 8661.
NIFTY 28-Jul-16 28-Jul-16 5 9 05 85

So lot size of NIFTY is 75. So long futures @ 8310 on 01/07/2016, it closes @ 8661.85

on expiry

Return = lotsize * (closing price-opening price)

50
 = 75 * (8661.85-8310)

= 75 * (351.85)

= 26388.75

Therefore as the margin requirement for NIFTY FUTURES is Rs.50000, then we get the

return of 52.77 % in one month.

SHORT FUTURES

When the market is in bearish we will take futures as short it means that when the market

is coming down future price is also coming down in this way we will gain returns on that

particular future. The calculation of return on short future is as below.

Example

The following table consists the future values of NIFTY from 01- 08-16 to 25-08-16

By observing the table the future values of NIFTY is gradually decreasing. If we take

long futures it will be beneficial.

T2-- Data for FUTIDX-NIFTY from 01-08-2016 to 25-08-2016:

Symb
ol Date Expiry Open High Low Close
8702. 8624.
NIFTY 01-Aug-16 25-Aug-16 2 8747 45 8682
8736. 8660.
NIFTY 02-Aug-16 25-Aug-16 8676 05 8638 3
8649. 8582.
NIFTY 03-Aug-16 25-Aug-16 8641 25 8568 55
8625. 8547. 8594.
NIFTY 04-Aug-16 25-Aug-16 25 8631 6 4
8632. 8631. 8708.
NIFTY 05-Aug-16 25-Aug-16 65 8717 6 2
8748. 8726. 8742.
NIFTY 08-Aug-16 25-Aug-16 5 8760 45 3
8739. 8751. 8661. 8702.
NIFTY 09-Aug-16 25-Aug-16 8 7 7 55
8717. 8598.
NIFTY 10-Aug-16 25-Aug-16 15 8724 8590 05
8612.
NIFTY 11-Aug-16 25-Aug-16 8595 8630 8565 45
NIFTY 12-Aug-16 25-Aug-16 8614 8702. 8613. 8678.

51
 5 95 4
8695. 8706. 8659.
NIFTY 16-Aug-16 25-Aug-16 35 25 8601 9
8650. 8689. 8610. 8631.
NIFTY 17-Aug-16 25-Aug-16 25 55 5 4
8655. 8713. 8655. 8685.
NIFTY 18-Aug-16 25-Aug-16 2 95 2 1
8692. 8677.
NIFTY 19-Aug-16 25-Aug-16 4 8703 8650 25
8680. 8693. 8633.
NIFTY 22-Aug-16 25-Aug-16 5 8 8616 2
8621. 8591. 8641.
NIFTY 23-Aug-16 25-Aug-16 25 8655 25 75
8640. 8682. 8617. 8654.
NIFTY 24-Aug-16 25-Aug-16 25 95 1 65
8679. 8585. 8596.
NIFTY 25-Aug-16 25-Aug-16 95 8685 95 2

So lot size of NIFTY is 75. So short futures @ 8702.2 on 01/08/2016, it closes @ 8596.2

on expiry

Return = lotsize * (opening price-closing price)

= 75 * (8702.2-8596.2)

= 75 * (106)

= 7950

Therefore as the margin requirement for NIFTY FUTURES is Rs.50000, then we get the

return of 15.90 % in one month.

4.2 RELATIONSHIP OF FUTURE PRICE WITH SPOT PRICE

IF FUTURE PRICE HIGHER THAN THE CASH PRICE

Here futures price exceeds the cash price which indicates that the cost of carry is

negative and the market under such circumstances is termed as a backwardation market or

inverted market.

EXAMPLE

52
 Suppose the RELIANCE share is trading at Rs.900 in the spot market. While

RELIANCE FUTURES is trading at Rs.906.Thus in this circumstances the normal strategy

followed by investors is buy the RELIANCE in the spot market and sell in the futures. On

expiry, assuming RELIANCE closes at Rs 950, you make Rs.50 by selling the RELIANCE

stock and lose Rs.44 by buying back the futures, which is Rs 6 in a month. Thus Futures

prices are generally higher than the cash prices, in an overbought market.

IF CASH PRICE HIGHER THAN THE FUTURE PRICE

Here cash price exceeds the futures price which indicates that the cost of carry is

positive and this market is termed as oversold market. This may be due to the fact that the

market is cash settled and not delivery settled, so the futures price is more a reflection of

sentiment, rather than that of the financing cost.

EXAMPLE

Now let us assume that the RELIANCE share is trading at Rs.906 in the spot

market. While RELIANCE FUTURES is trading at Rs.900.Thus in this circumstances the

normal strategy followed by investors is buy the RELIANCE FUTURES and sell the

RELIANCE in the spot market. So at expiry if Reliance closes at Rs 950, the investor will

buy back the stock at a loss of Rs 44 and make Rs 50 on the settlement of the futures

position. This is applied when the cost of carry is high.

4.3 ANALYSIS OF OPTIONS

Here we are discussing four basic strategies in analyzing options they are as below .

LONG CALL

When we anticipate the market is bullish we prefer LONG CALL strategy. It

means that when we purchase call option in the bullish market we will get returns as when

the market goes up obviously call option premium also increases.

53
EXAMPLE

Opti Strik Underl

Symb Expir on e ying
ol Date y Type Price Open High Low Close Value
01- 28- 105.2
NIFTY Jul-16 Jul-16 CE 8400 101.9 120.2 100.7 5 8328.35
28- 28-
NIFTY Jul-16 Jul-16 CE 8400 214.5 262 214.5 255.5 8666.3

Calculation of return for strike price 8400 as below.

Return = lotsize * (Close(28-Jul) - Open(1-Jul))

= 75 * (255.5-101.9)

= 11520

SHORT CALL

When we anticipate the market is bearish we prefer SHORT CALL strategy. It

means that when we sell call option in the bearish market we will get returns as when the

market comes down obviously call option premium also decreases so we sold at higher

premium price.

EXAMPLE

Strik
Opti e Underl
Symb Expir on Pric ying
ol Date y Type e Open High Low Close Value
01- 25-
Aug- Aug-
NIFTY 16 16 CE 8400 338 366.8 272.1 314.5 8636.55
NIFTY 25- 25- CE 8400 265.9 279.3 180.1 188.0 8592.2
Aug- Aug- 5 5
54
 16 16

Calculation of return for strike price 8400 as below.

Return = lotsize * (Open(1-Aug) - Close(25-Aug))

= 75 * (338-188.05)

= 11246.25

LONG PUT

When we anticipate the market is bearish we prefer LONG PUT strategy. It

means that when we purchase put option in the bearish market we will get returns as when

the market comes down obviously put option premium increases.

EXAMPLE

Opti
Symb on Strike Underlyi
ol Date Expiry Type Price Open High Low Close ng Value
01- 25-
NIFTY Aug-16 Aug-16 PE 8400 37.75 51.8 28.1 40.7 8636.55
03- 25-
NIFTY Aug-16 Aug-16 PE 8400 48.5 67.85 43.85 62.5 8544.85

Calculation of return for strike price 8400 as below.

Return = lotsize * (Close(3-Aug) - Open(1-Aug) )

= 75 * (62.5-37.75)

= 1856.25

SHORT PUT

55
 When we anticipate the market is bullish we prefer SHORT PUT strategy. It

means that when we sell put option in the bullish market we will get returns as when the

market goes up obviously put option premium decreases but we sold at higher premium .

EXAMPLE

Opti Underlyi
Symb Expir on Strike ng
ol Date y Type Price Open High Low Close Value
01-Jul- 28-Jul- 168.5
NIFTY 16 16 PE 8400 165.1 5 139.2 150.3 8328.35
28-Jul- 28-Jul-
NIFTY 16 16 PE 8400 0.75 0.75 0.05 0.05 8666.3

Calculation of return for strike price 8400 as below.

Return = lotsize * - (Open(1-Jul) - Close(28-Jul))

= 75 * (165.1-0.05)

= 12338.75

Based upon the above four strategies we conclude that when the market is bullish

take LONG CALL /SHORT PUT and when the market is bearish take LONG

PUT/SHORT CALL. The following illustration explains that how we will take the

strategies when the market is bullish or bearish.

IF THE MARKET IS BULLISH

BUY STOCK/LONG CALL/SHORT PUT

Under this strategy the speculator is bullish in the market. He could do any of the

following:

BUY STOCK

ACC spot price : 150

56
 No of shares : 200

Price : 150*200 = 30,000

Market action : 160

Profit : 2,000

LONG CALL OPTION:

Strike price : 150

Premium : 8

Lot size : 200 shares

Market action :160

Profit : (160-150-8)*200 = 400

SHORT PUT OPTION:

Strike price : 150

Premium : 7

Lot size : 200 shares

Market action :160

Profit : (160-150+7)*200 = 3400

This shows that investor can earn more in the put option because it gives 35%

returns over a investment of 2months as compared to 25% returns over a call option and

6.6% returns over a investment in stocks. But selling put option is always obligation it

means when the market comes down due to unfortunate reasons loss is unlimited so prefer

always buying the options rather than selling the options.

IF THE MARKET IS BEARISH

SELL STOCK/SHORT CALL/LONG PUT

57
 Under this strategy the speculator is bearish in the market. He could do any of the

following:

SELL STOCK

BPCL spot price : 560

No of shares : 100

Price : 560*100 = 56,000

Market action : 520

Profit : 4,000

SHORT CALL OPTION:

Strike price : 560

Premium : 20

Lot size : 100 shares

Market action :520

Profit : (560-520+20)*100 = 6000

ONG PUT OPTION:

Strike price : 560

Premium : 35

Lot size : 200 shares

Market action :520

Profit : (560-520-30)*100 = 1000

Return : 50% returns over 2months

This shows that investor can earn more in the call option because it gives 100% returns

over a investment of 2months as compared to 50% returns over a put option and 7.14%

returns selling in the stocks. But selling call option is always obligation it means when the

58
market goes up due to unfortunate reasons loss is unlimited so prefer always buying the

options rather than selling the options.

CHAPTER-5
SUMMARY
59
 &
COMCLUSION

5.1 RESULTS AND DISCUSSIONS

The following results are made on the basis of data analysis from the previous Chapter.

The study reveals the effectiveness of risk reduction using hedging strategies. It has

found out that risk cannot be avoided. But can only be minimized.
Through the study. it has found out that, the hedging provides a safe position on an

underlying security. The loss gets shifted to a counter party. Thus the hedging covers

the loss and risk. Sometimes, the market performs against the expectation. This will

trigger losses. so the hedger should be a strategic and positive thinker.

The anticipation of the hedger regarding the trend of the movement in the prices of the

underlying security plays a key role in the result of the strategy applied.

60
 It has been found that, all the strategies applied on historical data of the period of the

study were able to reduce the loss that rose from price risk substantially.
If the trader is not sure about the direction of the movement of the profits of the

current position, he can counter position in the future contract and reduces the level of

risks.
The trader can effectively use the strategy for return enhancement provided he has the

correct market anticipation.

In general, the anticipation of the strategies purely for return enhancement is a risky

affair, because, if the anticipation about the performance of the market and the

underlying goes wrong, the position taker would end up in higher losses.

5.2 SUGGESTIONS

If an investor wants to hedge with portfolios, it must consist of scripts from different

industries, since they are convenient and represent true nature of the securities market

as a whole.
The hedging tool to reduce the losses that may arise from the market risk. Its primary

objective is loss minimization, not profit maximization .The profit from futures or

shares will be offset from the losses from futures or shares, as the case may be.
Hedger will earn a lower return compared to that of an unhedger. But the unhedger

faces a high risk than a hedger.

The hedger will have to be a strategic thinker and also one who think positively. He

should be able to comprehend market trends and fluctuations. Otherwise, the strategies

adopted by him earn him earn losses.

61
A lot more awareness needed about the stock market and investment pattern, both in spot

and derivative market. The working of BSE Training Institute and NSE Institutes are

apprehensible in this regard.

5.3 CONCLUSION

Derivative trading provides lot of opportunities in the market but the investor

should have a deep insight of derivatives and use of different product combinations.

An investor should book profit than anticipating more profits because unlike equity

markets small price movement in equity may show some adverse impact on the

premium amount under Futures and options.

Short positions should be handled carefully because of unlimited loss liability with

limited profits.

Investor should try to hedge his/her positions to minimize losses rather anticipating

huge profits.

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 Avoid taking positions in contact where liquidity is low.

Avoid taking contracts belonging to underlying equity whose liquidity is low and

with less volume, which will lead to unusual stock movement.

Investor should follow the principle of strict stock losses to cut down losses.

Investor should make a simultaneous use of call options and put options, in case

the volatility in share prices is unexpected.

BIBLIOGRAPHY

Websites:

www.nseindia.com

www.bseindia.com

www.sebi.gov.in

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