derivatives GP PowerPoint Presentation.ppt

7/27/2019 derivatives GP PowerPoint Presentation.ppt

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INDIAN STOCKMARKET DERIVATIVES


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INTRODUCTIONTODERIVATIVES

The main instruments under the derivatives are:

1. Forward contract

2. Future contract3. Options

4. Swaps


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DEVELOPMENT OF DERIVATIVES MARKET IN INDIA

Business growth of futures and options market: NSE Turnover (Rs.cr)

MonthIndexfutures

Stockfutures

Indexoptions

Stockoptions Total

Jun-00 35 - - - 35

Sep-00 119 - - - 119

Dec-00 237 - - - 237

01-Mar 381 - - - 381

01-Jun 590 - 196 - 785

01-Sep 2857 - 559 2012 5281

01-Dec 2339 7515 405 2660 12919

02-Mar 2185 13989 360 3957 20490

2001-02 21482 51516 3766 25163 101925


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Instruments available in India

Products Index Futures Index Options Futures onIndividualSecurities

Options onIndividualSecurities

UnderlyingInstrument

S&P CNX Nifty S&P CNX Nifty31 securities

stipulated by SEBI

31 securitiesstipulated by

SEBI

Type European American

Trading Cycle

maximum of 3-monthtrading cycle. At any

point in time, there willbe 3 contracts available :

1) near month,2) mid month &

3) far month duration

Same as indexfutures



Expiry DayLast Thursday of the

expiry monthSame as index

futuresSame as index

futuresSame as index

futures

Contract SizePermitted lot size is 200

& multiples thereofSame as index

futures

As stipulated byNSE (not less than

Rs.2 lacs)

As stipulatedby NSE (not

less than Rs.2lacs)


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OPTIONS

The Parties to an Option

The options are of two styles.

1) European option and2) American option

The options are of two types.

1) Call option and2) Put option.


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

Money

CALL OPTION PUT OPTION

In-the-money Strike price < Spot price Strike price > Spot price

At-the-money Strike price = Spot price Strike price = Spot price

Out-the-money Strike price > Spot price Strike price < Spot price


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Option value

Intrinsic value and

Time value.


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Factors affecting the value of an option

Factor Option Type Impact on Option Value Component ofOption Value

Share price moves up Call Option Option Value will also move up Intrinsic Value

Share price moves down Call Option Option Value will move down Intrinsic Value

Share price moves up Put Option Option Value will move down Intrinsic Value

Share prices moves down Put Option Option Value will move up Intrinsic Value

Time to expire is high Call Option Option Value will be high Time Value

Time to expire is low Call Option Option Value will be low Time Value

Time to expire is high Put Option Option Value will be high Time Value

Time to expire is low Put Option Option Value will be low Time Value

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

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

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

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


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OPTIONS ON NIFTY & INDIVIDUAL

SECURITIES Trading cycle

Expiry day

Strike Price Intervals

Contract size


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DERIVATIVES TRADING STRATEGIES

USING OPTIONS

Classification Of Strategies According To Market View

When market to be bullish: Buy index/ stock futures

Buy call option

Sell put option

Bull call spread

Bull put spread

Bullish calendar spread

When market to be bearish: Sell index/ stock futures

Sell call option

Buy put option

Bear call spread

Bear put spread

Bearish calendar spread


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When market to be uncertain but expects to move in either

direction sharply: Long straddle

Long strangle

Covered call

Strips

Straps

When market to remain stable: Short straddle

Short strangle

Butterfly spreads

Neutral calendar spread


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BULL CALL SPREAD:buy a call and sell a call with different strike price and same expiry date with sell call strikeprice higher than the buy call strike price.

140

BEP= 142

P

r

of

i

t

L

o

ss

8

4

-2

-6

Profit/loss of

Long call

Profit/loss ofShort call

150

146

Example:

Assumptions: Spot price of ACC - Rs 142, Mutiplier : 1500

Buy ACC April 140 call @ Rs 6 & Sell ACC April 150 call @ Rs 4Break-even point: Rs 142There are four scenarios at the expiry date:ACC 140 and 142 and 150. Profit = (150 142) * 1500Limited risk: since the loss can be maximum to the extent of net premium paid. Limited Profit: maximum being the difference between higher strike price option and lower strike price

option after deducting the net premium paid.


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P

r

o

f

i

t

L

o

s

s

2

-4

-8

6 Profit/loss of

Long call

150

142140

Profit/loss of

short call

BEAR CALL SPREAD:Buy a call and sell a call with different strike price and same expiry date with sell call strikeprice lower than the buy call strike price.

Example:

Assumptions: Spot price of ACC - Rs 142

Sell ACC April 140 call @ Rs 6 & Buy ACC April 150 call @ Rs 4

Mutiplier : 1500Break-even point: Rs 142There are four scenarios at the expiry date:ACC 140 and 142 and 150. Loss = (150

142) * 1500Limited risk: since the loss can be maximum of Rs 12000.Limited Profit: maximum being the difference between premium received and premium paid.


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P

r

o

f

i

t

Lo

s

s

-3

-5

-2

135

138 140 150 153

155

Long CallLong Put

LONG STRANGLE:Buy a call and buy a put with same expiry date but different strike price, with the put strikeprice lower than the call strike price and when one is uncertain about the market but expectsit to move in either direction sharply.

Example:

Assumptions : Spot price of the ACC Rs 145 , Multiplier : 1500Buy ACC Sep. 140 put @ 2 & Buy ACC Sep. 150 call @ 3

Break-even point : Rs 155 for call option/ Rs 135 for put option There are five scenarios at the expiry date.ACC 135 & 140 & 150 & = 155. Profit = (closing price at expiry 155)*1500

Limited risk: since loss can be limited to the extent of premium paid.Returns : unlimited as the maximum gain could be greater if sharp movement occur.


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SHORT STRADDLE:Sell a call and sell a put with the same strike price and same expiry date whenprices are expected to be stable.

P

r

o

f

i

t

L

o

s

s

9

17

8

132

140

149

123 157

Sell CallSell Put

Example

Assumptions:

Multiplier: 1600Sell Tata Sept. 140 call @ 9 & Sell Tata Sept. 140 put @ 8Break-even point : 157 for call option/ 123 for put optionTata 123 & 140 & 157. Loss = (closing spot price at expiry - 157)*1600Risk: the maximum risk could be greater if sharp movements occur.

Limited profit: since profit can be limited to the extent of premium received.Max. profit is Rs. 27200(17*1600) at a price of 140


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Put/Call Ratio

UncertainGreater than 0.35 andless than 0.75

Extremely bearishGreater than 0.75

Extremely bullishLess than 0.35

IndicationP/C ratio


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OPEN INTEREST (An indicator)

Some interpretations using Open Interest:

Rising open interest in an uptrend is bullish

Declining open interest in an uptrend is bearish.

Rising open interest in a downtrend is bearish.

Declining open interest in a downtrend is bullish.

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

Very high open interest at market tops is dangerous

and can intensify downside pressure.


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FUTURES

Only the sellers have to put

in margins.

Both the parties have to put

in margins.

Impose obligations on the

sellers only.

Impose obligations on both

the parties

The buyers have to pay a

premium to the sellers.

There is no premium

Risk exposure and profit

potential are limited for theseller.

Risk exposure and profit

potential are unlimited forboth the parties.

OptionsFutures

DIFFERENCE BETWEEN FUTURES AND OPTIONS


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Types of Futures

Agricultural

Metallurgical

Interest Bearing Assets

Indexes

Foreign Currencies


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Margin Money

Different Types of Margins: Initial Margin

Mark-to-Market Margin Maintenance Margin

Additional Margin

Cross Margining


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THE BLACK -SCHOLES

MODEL

(An option pricing model)


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FINDINGS

Growth:

Cash market- turnover-3692 cr. (BSE & NSE)

Derivatives market- traded value - 2417 cr.

Factors that hinder the growth of Derivatives

Market in India:

Market is dominated by few large players.

Very high minimum contract size.

Initial investment. Number of scrips available for trading is 31.

Cash settlement only.


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Thank you

Documents

derivatives GP PowerPoint Presentation.ppt