CONTENTS

SNO PARTICULARS

1 ABSTRACT

2 INTRODUCTION ABOUT COMPANY

3 INTRODUCTION ABOUT DERIVATIVES

3.1 ISSUES IN DERIVATIVES

3.2 SYSTEMATIS RISK

3.3 BASIC RISK

3.4 COUNTERPARTY RISK

4 FINANCIAL DERIVATIVES – DEFINITION

4.1 TYPES OF DERIVATIVES

4.2 FORWARD CONTRACTS

4.3 FUTURES CONTRACT

4.4 FUTURES TERMINOLOGY

4.5 PERMITTED LOT SIZES OF CONTRACT

4.6 OPTIONS CONTRACT

4.7 OPTIONS TERMINOLOGY

5 VOLATILE MARKET

6 CHARACTERISTICS OF VOLATILE MARKET

6.1 VOLATILITY IS CYCLICAL

6.2 VOLATILITY IS PERSISTENT

7 IDENTIFICATION OF VOLATILE MARKET

8 TYPES OF SECURITIES

9 SCIENTIFIC METHOD INVOLVED IN IDENTIFYING SECURITY

9.1 AVERAGE RANGE

9.2 STANDARD DEVIATION

9.3 BETA COEFFICIENT

9.4 R- SQUARED

9.5 GEOMETRIC STANDARD DEVIATION

10 IDENTIFICATION OF SECURITIES

11 COMPARISON OF SECURITIES WITH THE MARKET

12 DERIVATIVE STRATEGY

12.1 STRADDLE

12.2 STRANGLE

12.3 BULL SPREAD WITH CALL OPTION

12.4 BEAR SPREAD WITH CALL OPTION

12.5 BULL SPREAD WITH PUT OPTION

12.6 BEAR SPREAD WITH PUT OPTION

12.7 BOX SPREAD

12.8 BUTTERFLY SPREAD WITH CALL OPTION

12.9 BUTTERFLY SPREAD WITH PUT OPTION

13 CALCULATION OF PAYOFF

14 CONCLUSION AND RECOMMENDATIONS

15 REFERENCES

1. Abstract

The project began with the study of what derivative is and what are the types of

derivatives that has been trading in India and I was taught the basics of future and option

trading in India. After getting the basic knowledge about derivatives the project work

started with

Identification of volatile market

Identification of securities

- High volatile securities

- Low volatile securities

Comparison of securities with the market

Strategies for volatile market

Payoff calculation for the strategies

Propose the best strategy for the volatile market condition

2. PROFILE OF STOCK HOLDING COPORATION OF INDIA LTD

INTRODUCTIONFlagged off at the initiative of the Government of India, SHCILenjoys an enviable parentage that

includes leading Indian financial institutions and insurance majors like IDBI, UTI, ICICI, LIC

GIC and its subsidiaries, IFCI and IIBI. Their original focus was to manage the entire array of

post trade activities of Financial Institutions and Foreign Institutional Investors with dedicated

client relationship teams and state-of-the-art reporting systems.

It has been an eventful journey rewarding them with a 50% market share and the biggest

investing bodies of the country for clients.

From their inception to achieving and retaining the mantle of the largest Depository

Participant in the country, it is their dream and vision that has helped them. Where they have

made the difference is at understanding ideas, managing them, at arranging their organizational

strengths and translating these new exposures into service and business activities.

Their technological support not only holds enormous databases together, but makes sense

and searvice out of it too. The State-of-the-art Information Technology tools deployed by SHCIL

is a laureate of lthe computerworld Honors Program. SHCIL has also received National IT award

from the Computer Society of India.

Their adaptability to the changing requirement of the market is one of their main

strengths. The biggest changeover in the SHCIL story has been expansion and diversification.

Year 1996 marked a fundamental shift for the Indian capital markets. The Depository Act

changed the way the capital market, specifically the stock exchanges, investors and related

organization would function. Securities Exchange Board of India with its guiding Hand, set up a

framework for changing over capital market investing and trading from paper to electronic mode.

The depository culture has accelerated since then, probably unmatched by any other country.

Accordingly, from servicing financial institutions, they have timed their move into the extensive

individual investro populace. They have enriched their organisatinal strengths and fine-tuned the

front-end interfaces to cater to the distinct needs of the individual investor. A specially trained

pool of over 1500 professionals provides personalised service to their client investors. To enable

easy reach, they have accelerated their distribution network from four offices in 1997 to over 100

offices across the country. Dedicated leaseline network links across these offices, independent

systems setups and off-site backups provide the platform for traditional servicing as also for new

e-commerce applications. The results are definite. Four years back, they signed in their first

individual investor client. Today, SHCIL serves a satisfied clientele of around seven lakh

accounts.

They ensure that their financial product offerings are related closely, not just disjointed services

added on. Alongside expansion, the thinking has been at diversifying further into areas of

financial products and services. Their new products are an echo of market requirements, customer

feedback and needs. Rather than coming out with products which would suit their organisational

needs, the accent is on channeling technology to make convenience products for financial

markets. They formulate new products that give quantum benefits to linvestors, corporatins and

brokers and also fit into the mosaic of their product mix.

Glolbalisation of the market has led to a manifold increase in investment. New markets have

been opened new instruments have been developed and new services have been launched.

Besides, a number of opportunities and challenges have also been thrown open. Stock Holding

Corporation of India Ltd.,(SHCIL), the premier custodian of Indian capital market providing

services of international standards, is gearing up to reposition itself in the changed scenario. With

world – acclaimed automation and a team of committed professionals, SHCILis confident of

scalilng new heights.

INTRODUCTION TO THE COMPANY

Stock Holding Corporation of India Ltd. (SHCIL) was incorporated under the Companies act

1956 at the initiative of the Government of India. It is promoted by the all India financial and

investment institutions and insurance companies viz., IDBI, UTI, ICICI, IFCI, IBI, LIC, GIC, and

its subsidiaries.

SHCIL commenced operations in August 1988 and has been providing custodial and

related services of international standards for nearly a decade to the promoter and other

institution, Foreign Instiutional Investors (Flls), Commercial Banks and Mutual Funds. Being a

premier custodian of the country. SHCIL today holds more than Rs. 80,000 crores worth of

clients assets. The turnover of the corporation exceeds Rs.10,000 crores per annum. SHCIL has

been earning profit and declaring dividend right from the inception. SHCIL already has securities

worth Rs.26000 crores in electronic form.

SHCIL is the first depository participant to be registered with the National Securities Depository

Ltd.(NSDL). SHCIL offers the facility of operating beneficiary account for individuals and

corporates as well as clearing account for brokers.

This manual has been prepared exclusively for their account holder. It gives the

overview of the depository system and explains in details, various operation relating to individual

accounts. The aim is to impart to their account holders, knowledge about the working of

depository system and facilitate a smooth transition from physical to electronic tradings.

BRANCHES:

SHCIL has a network of more than 120 branches spread across the country providing services at

doorstep to their client with Head Office at Mumbai. In Karnataka there are 12 branches spread

over the entire region.

MISSION“To spread quality services through the innovative use of technology”

OBJECTIVES OF THE SHCIL

1. To eliminate paperwork and bring in front of electronic stock market (E-Stock

Market) on India

2. To ensure satisfaction through teamwork and professional management.

3. To extend effective guidance to brokers, to clearing house Corporation,

companies and investor in E-Stock Trading

4. To provide good quality of services on a continuous basis to the satisfaction of

clients

5. To encourage every one in the organization to upgrade and enhance there skills

and knowledge in computerized environment.

6. To attain specified level of performance every year and ensure compliance with

statutory requirements.

PRODUCTS AND SERVICES

SERVICES:

CUSTODIAL SERVICES

Since its commencement in 1988 as the premier Custodian in the country, SHCIL has

been providing Custodial Services of international standards to Financial Institutions, Foreign

Institutional Investors and Domestic Mutual Funds.

With almost 70% of the Institutional business to its credit, SHCIL has graduated to providing

specialised services to large investing institutions.

A dedicated pool of trained professionals working in interconnected offices across the country,

linked to client institutions, Stock Exchanges, Depositories and brokers through state-of-the-art

telecommunication channels, is at the helm of SHCIL's Custodial services

Lodgements and Custodial Services

SHCIL has specialized sections catering to all activities (lodgment, objections handling, follow-

ups, client reporting etc.) associated with the Lodgment of securities with the respective company

and ensuring their quick transfer to the purchaser.

On receipt of the transferred securities, securities are held in state-of-the-art, high-security vaults

on behalf of the clients. A pioneer in introducing the bar-coding system to track certificates,

SHCIL ensures the availability of each and every share certificate at a moments notice

Corporate Actions The Corporate Actions cell ensures timely collection of monetary and non-monetary benefits on

behalf of the client. It covers all activities relating to Corporate Actions like calculation of

entitlements, receipt of monetary Corporate Actions and transfer of the same to clients.

Customized reporting to clients on the status of Corporate Actions is done periodically.

The Primary Markets cell takes care of applications on behalf of clients for primary market

issues, calculates the entitlements, follows up for allotment or refunds and sends customised

reports to clients.

Data Bank Services

To serve clients, the Corporation requires a large amount of information from the Stock

Exchanges, Depositories, SEBI, Companies and other entities of the capital market. The

Databank department collects, compiles and maintains information that is required by the

Corporation for carrying out market obligations. Databank maintains information of

approximately 12,500 instruments, 8500 companies, 2500 Registrars, two Depositories and six

Stock Exchanges namely BSE, NSE, OTCEI, DSE, CSE and MSE.

Databank also maintains the following data :

a. Information regarding various scrips ( listed and unlisted) in which our clients have

holdings.

b. Information pertaining to book closures / record dates for corporate events, ex-dates

and no delivery schedules for various Stock Exchanges.

c. Details of monetary and non-monetary benefits.

d. In the electronic segment, information such as ISIN data, the Registrars handling demat for a

company, the scrips under compulsory demat trades as declared by SEBI, scrips included in

compulsory rolling segment etc. are also maintained.

e. NAV information of all Mutual Fund schemes

Reporting - Custodial Services

The Client Interface Cell is a single point contact for all Client Issues.

Detailed, reconciled statements and customized reports are made available to clients periodically

or as and when desired by the clients.

Street Name Securities

This is a special service offered to clients who wish to turn around their portfolio in a speedy

manner. The securities purchased by the clients are not sent for registration, but are stored in the

safe deposit vaults of the Corporation. Adequate measures are taken to ensure no benefit losses

due to corporate events or any document expirations.

DEPOSITORY PARTICIPANT SERVICES

Introduction:

Their Depository Participant services addresses individual investment needs. With a parentage of

leading financial institutions and insurance majors and a proven track record in the Custodian

business, they have reiterated their past success by establishing themselves as the first ever and

largest Depository Participant in India

From a tentative foray in 1998 into the individual investor arena to servicing around seven lakh

accounts, the have endeavored to constantly add and innovate to make business a pleasure for

their client.

Over 100 of our networked branches ensure they are available where their client look out.

Across the country, fourteen Depository Participant Machines (DPMs) connected to NSDL and

seven connected to CDSL ensure fast and direct processing of clients instructions.

Their customer-centric account schemes have been designed keeping in mind the investment

psyche of their clients. A DP account with SHCIL takes care of client’s Depository needs like

dematerialisation, rematerialisation and pledging of shares.

.

At SHCIL, they place a very high premium on client reporting. Periodic statements sent to client

keep them informed of their account status. Dedicated Customer Care lines manned by trained

staff answer client’s queries on demat / trades / holdings. The latest in client response at SHCIL is

Interactive Voice Response (IVR) system for round the clock information on their account.

Registration on theirr website, SHCIL Interactive, enables them to check their account-related

information, stock market reports and statistics, Corporate benefits declared by companies,

realtime quotes of scrips on BSE and NSE and so much more online.

Demat

Dematerialisation is the process of conversion of shares from physical form to the electronic

mode. Their dedicated demat team enable the client to convert their physical holdings into

electronic mode in a quick and hassle-free manner.

As per SEBI, scrips can be divided as :

Scrips eligible for demat.

These scrips can be traded either in physical or electronic form

Scrips falling under compulsory demat.

Scrips can be traded only in electronic form.

Scrips falling under transfer cum demat.

In this category, the shares purchased by the client in the physical form can be sent to the

Registrar / Company for transfer and dematerialisation at the same time.

Process for Dematerialization / Rematerialization

Once demat account of client is opened with SHCIL and have received their client identity

number, they can start dematerialising their shares. They can submit the shares over the counter at

any of their branches.

When the company gives credit, those shares will reflect under "free" column in the Client ID.

Now client can sell these shares. In case the company is not satisfied with the details furnished, it

will reject the shares

If the company has rejected Client’s shares, SHCIL will forward the shares to Client on receiving

them from the company.

CLEARING- MEMBERS SERVICES

Introduction

SHCIL's long-standing association with Clearing Members has enabled it to develop services

based on an understanding of their working and their requirement for timely and accurate

information

SHCIL accept deposits of base capital and Additional base capital requirements stipulated by

NSE for clearing members trading on its capital market segment. Besides, their new products

with a broker empanelment clause ensure a mutually beneficial tie-up. Clearing members stand to

earn a steady income from their product transactions and this adds to their client-base, while they

capitalize on their rapport with the market

SHCIL currently offer Depository services to more than 680 clearing members of various

exchanges connected with NSDL and CDSL.

Custodial Services for CM

Custodial services for Base Capital / Additional Capital requirements

They accept deposits of Base Minimum Capital (Base Capital) and Additional Base Capital as

stipulated by NSE for clearing members to be able to trade on its capital market segment.

The securities being deposited shall be subject to legal and beneficial ownership of:

TM clearing member / spouse in case of individuals.

Any of the partners / their spouses in case of partnership

Any of the directors in case of corporate TM clearing member.

NRI SERVICESOver the years, SHCIL has grown to become a major player in the capital market. With a

network of more than 120 offices operating across the country and franchisees operating

abroad, SHCIL provides Depository Participant and related services close to 0.7 million

satisfied investors out of which over 6000 are NRI Clientele.

SHCIL has a full-fledged NRI cell operating specifically to cater needs pertaining to

Depository account opening and maintenance. NRI cell co-ordinates with prospective NRI

customers, collects and assists in obtaining the relevant documents and ensures the Depository

Account is opened hassle free.

NRI Cell collects physical certificates to be sent for demat and ensures that the certificates are

in order and can be sent for dematerialization under the existing guidelines issued by the

depositories. Instructions for trade are accepted by fax on request by NRI Cell to ensure timely

settlement of trades. In this case later on the client needs to regularize by sending the original

trade delivery instruction. NRI Cell addresses any tariff and billing related query.

In short NRI Cell is a single point contact for any matter relating to NRI Depository

operations.

PRODUCTS:

ADD Shares

This is a product by which SHCIL arranges loans against demat shares for its clients at the

competitive interest rates. They can use the shares in their free account as a collateral and take

a loan from any of their empanelled banks. SHCIL complete documentation and processing and

give the cheques within 48 hours of application to their clients.

Features

Loan against demat shares held in the DP account with SHCIL

SHCIL processes the entire paperwork required with the bank.

The service is available at any of over 100 branches of SHCIL.

CASH –ON-PAYOUT

Usually client need to follow-up with their broker for the funds after they have sold their

securities. When they sell through Cash-on-Payout, they give client a cheque on the next day of

payout.

Cash-on Payout is a variant of Sell-n-Cash and it comes in handy when you don't need immediate

payment but at the same time are looking for an timely payment without delays.

Cash on Payout has a very competitive service charge which may actually be lesser than what

client is currently paying your broker.

FUND INVEST

Fund Invest is a basket of financial products, ranging from fixed income securities like Fixed

deposits, Infrastructure bonds and Capital Gain Bonds to variable income securities like Initial

Public Offers (IPOs) of Equities and Mutual Funds. This is a financial product that caters to the

various investment needs of their clients. SHCIL is an AMFI Registered Mutual Fund Advisor

(ARMFA).

Features

At present, they are distributing more than 25 schemes of different Mutual Funds

Capital Gains Bonds come under 54 EC Capital Gains Bonds, where investors get

exemption from Capital Gain tax. These are 'on -tap ' issues. At present, SHCIL is

distributing Capital Gain Bonds of Rural Electrification Corporation, National Housing

Bank, Small Industries Development Bank of India and National Highway Authority of

India. Infrastructure Bonds are issued by ICICI Bank and IDBI, with Section 88 as the

main feature.

Private Placements: Stock Holding distributes Debt papers issued for Private Placement

with Structural Obligations by the State and Central Government, typically targeted for

Trusts and Provident Funds.

Fixed Deposits: SHCIL distribute fixed Deposits with high investment rating and issued

by blue- chip corporate. These papers generally offer 50 to 100 basis points more than

bank fixed deposits of comparable period. At present, SHCIL are distributing IDBI

Suvidha Fixed Deposits and HDFC Fixed Deposits.

Initial Public Offer: IPOs offered from blue chip corporate can be subscribed from

Stock Holding. Issues recently distributed by SHCIL are NDTV, Maruti Udyog,

Datamatics Solutions, ONGC etc..

GOI BONDS

RBI on behalf of Government of India issues Savings Bonds in two different series.

6.5% tax free bonds

8.0% taxable bonds

These Bonds are held in electronic form in an account called Bond Ledger Account (BLA).

Bond Ledger Accounts can be opened and operated with RBI designated receiving Offices. RBI

has designated SHCIL as one of the Receiving Offices for this purpose. Savings Bonds being

sovereign in nature are absolutely safe and an attractive investment option in the current

volatile market situation.

STOCK DIRECT

STOCK direct - India's first online trading platform was launched in 1999. Today STOCK

direct is the most secure online trading platform which combines encryption technology /

digital signature as well as Smart Card security features.

Client can trade from home on the Internet with a floppy containing the STOCK direct

software.

For people who are not inclined to trading on the net, SHCIL has Request Transmitting

Machines (RTMs) placed at specified SHCIL centers. This is an electronic touch screen kiosk

where you can insert your smart card and trade effortlessly.

STOCK LENDING

SHCIL has been granted the approval to act as Approved Intermediary by SEBI in

April, 1998. If client is the lender, client retain all the benefits of ownership other than voting

rights. Through Stock lending, your holdings that SHCIL manage, can be temporarily

transferred to a third party to earn a fixed income for client.

As a borrower, a person can utilize borrowed securities the way he want provided he return the

securities along with the accrued benefits at the end of the loan period. Securities deposited

with SHCIL by the investors for lending will not be treated as sale and hence will not attract

any capital gains tax. The interest income received will be taxed like any other income. Flexible

period of borrowing is available from 4 days to 84 days. Securities deposited with SHCIL for

lending will not attract any custody charges during the period the securities are lent.

But this year the lending license of SHCIL is not renewed by the SEBI.

2. Introduction about derivatives

The technical definition is 'a financial contract the value of which is derived from

the value of another (underlying) asset, such as an equity, bond or commodity.'

Derivatives have been around for a long time, though without stirring much

controversy. Forward contracts were used by Flemish traders in the 12th century.

Contracts resembling today's futures and options were widely used in the 17th century in

Amsterdam, when it was the financial capital of the western world, and at about the same

time in Osaka's rice market.

Organized commodity-futures exchanges were set up in Chicago and New York

in the middle of the 19th century. 'Complex' financial instruments are nothing new either.

In a quarter of a century the global financial marketplace has undergone a

transformation equivalent to replacing a village shop with a shopping mall. In 1986 the

total outstanding value of derivatives markets was just over $ 1 trillion; in 1994 it was $

20 trillion

Derivatives have flourished because a series of recent developments have

transformed them into a cheap and efficient way of moving risk about within the

economic system. After the collapse of the Bretton Woods fixed-exchange-rate regime in

the early 1970s, floating exchange rates fuelled demand for ways to cope with the

resulting currency risk. This led to the development of exchange-traded foreign-exchange

futures in Chicago, a successful innovation that was to spawn many more. The

availability of large, low-cost computing capacity was also vital, as pricing some

derivatives involves complex number-crunching.

2.1 Issues in derivatives

The three separate issues in derivatives are as follows:

How well the buyer understands what the derivative does;

What the derivative is being used for

What risks are inherent in the derivative itself?

The first two questions are really about the qualities of the buyer rather than of the

product. Many so-called derivatives disasters are in fact speculative disasters that might

just as easily have happened if the investor had been punting in shares or equity.

Of the risks associated with derivatives themselves, the one that gets the most

headlines is

2.2 Systemic risk

The possibility that loss on a derivative contract might cause a bank to go bust,

producing knock-on effects throughout the global financial system. This has given

nightmares to financial regulators around the world. To improve the quality of their sleep,

they have already demanded fuller disclosure of banks' derivative activities and required

them to put aside capital to cover potential losses. Further controls are in the pipeline.

Derivatives, however, are by no means the only source of systemic risk. Fears of

systemic collapse have also been raised recently by the third-world debt crisis and by the

collapse of the developed world's commercial-property market. Moreover, although some

critics have blamed derivatives for increasing volatility in financial markets (and, among

other things, causing the 1987 stock market crash), most investigations into such claims

have exonerated them. Indeed, it now looks more likely that it was the volatility in

financial markets that boosted demand for derivatives, and that by reducing that volatility

they actually lessened systemic risk.

Non-financial firms need to watch out for three main risks when using derivatives. They

are as follows

3.3 Market risk

The possibility that the value of the derivative will change. This is essentially no

different from the risk involved in buying an equity or bond, or holding a currency -

except that the market risk may be magnified many times if the derivative is leveraged;

indeed some of the most famous disasters, including Procter & Gamble's losses, were

associated with leveraged products.

The other difference compared with equities, bonds and so on is that the value of

an option changes increasingly quickly as it becomes more likely to be exercised.

2.3 Basis risk

The derivative used may not be a perfect match with whatever it is intended to

hedge, so that when the value of the underlying asset falls, the value of the derivative

may not raise by the expected amount.

2.4 Credit or 'Counterparty' risk:

The institution concerned will get into trouble and be unable to pay up. Bear in

mind, however, that the credit risk on buying a derivative is less than that on, say, making

a loan, as the cost of replacing a derivative contract is only the amount to which the

market has moved against the buyer since the original contract was drawn up, whereas

for the loan it is the entire amount lent.

Derivatives bought from banks are exposed to bigger credit risks than those

bought from exchange. This is because exchanges guarantee contracts, and, unlike banks,

ensure they can cover them by requiring traders to stump up cash ('post-margin') to cover

potential losses in advance. However, this increases the possibility that a firm might face

liquidity problems.

If there is any doubt about the financial strength of the firm selling a derivative,

the best advice is to leave well alone. Derivatives have brought a neat twist to the

relationship between firms and their banks. Increasingly companies, used to having their

quality as clients investigated by their banks, are instead sitting in judgment over their

banks.

3. Financial Derivatives – Definition

Financial derivative is a financial instrument whose pay-offs depends on a more

primitive or fundamental good. For example a gold futures contract is a derivative

instrument, because the value of the future contract depends on the value of the gold that

underlies the futures contract. The value of the gold is the key since the value of the gold

future contract derives from the value of underlying gold.

3.1 Types of derivatives

Forward

Futures

Options

Swaps

3.2 Forward contract

A forward contract is an agreement between two parties that commits one to sell

and the other to buy a stipulated quantity and grade of a commodity, currency, security,

index or other specified item at a set price on or before a given date in the future.

3.3 Futures contract

It involves an obligation on both the parties (i.e.) the buyer and the seller to fulfill

the terms of the contract (i.e.) these are predetermined contracts entered today for a date

in future.

3.4 Futures terminology

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

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-month 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.

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 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.

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

instance, the contract size on NSE’s futures market is 200 Nifties.

3.5 Permitted Lot Sizes of Contracts

No. Underlying SymbolMarket Lot

1 S&P CNX Nifty NIFTY 200

2 CNX IT CNXIT 100

Derivatives on Individual Securities

1 Associated Cement Co. Ltd. ACC 1500

2 Andhra Bank ANDHRABANK 4600

3 Arvind Mills Ltd. ARVINDMILL 4300

4 Bajaj Auto Ltd. BAJAJAUTO 400

5 Bank of Baroda BANKBARODA 1400

6 Bank of India BANKINDIA 3800

7 Bharat Electronics Ltd. BEL 550

8 Bharat Heavy Electricals Ltd. BHEL 600

9 Bharat Petroleum Corporation Ltd. BPCL 550

10 Canara Bank CANBK 1600

11 Cipla Ltd. CIPLA 1000

12 Dr. Reddy's Laboratories Ltd. DRREDDY 200

13 GAIL (India) Ltd. GAIL 1500

14 Grasim Industries Ltd. GRASIM 350

15 Gujarat Ambuja Cement Ltd. GUJAMBCEM 1100

16 HCL Technologies Ltd. HCLTECH 1300

17 Housing Development Finance Corporation Ltd. HDFC 600

18 HDFC Bank Ltd. HDFCBANK 800

19 Hero Honda Motors Ltd. HEROHONDA 400

20 Hindalco Industries Ltd. HINDALC0 300

21 Hindustan Lever Ltd. HINDLEVER 2000

22 Hindustan Petroleum Corporation Ltd. HINDPETRO 650

23 ICICI Bank Ltd. ICICIBANK 1400

24 I-FLEX Solutions Ltd. I-FLEX 300

25 Infosys Technologies Ltd. INFOSYSTCH 200

26 Indian Petrochemicals Corpn. Ltd. IPCL 1100

27 Indian Oil Corporation Ltd. IOC 600

28 ITC Ltd. ITC 300

29 Jet Airways (India) Ltd. JETAIRWAYS 200

30 Mahindra & Mahindra Ltd. M&M 625

31 Maruti Udyog Ltd. MARUTI 400

32 Mastek Ltd. MASTEK 1600

33 Mahanagar Telephone Nigam Ltd. MTNL 1600

34 National Aluminium Co. Ltd. NATIONALUM 1150

35 National Thermal Power Corporation Ltd. NTPC 3250

36 Oil & Natural Gas Corp. Ltd. ONGC 300

37 Oriental Bank of Commerce ORIENTBANK 1200

38 Punjab National Bank PNB 1200

39 Polaris Software Lab Ltd. POLARIS 1400

40 Ranbaxy Laboratories Ltd. RANBAXY 400

41 Reliance Energy Ltd. REL 550

42 Reliance Industries Ltd. RELIANCE 600

43 Satyam Computer Services Ltd. SATYAMCOMP 1200

44 State Bank of India SBIN 500

45 Shipping Corporation of India Ltd. SCI 1600

46 Syndicate Bank SYNDIBANK 7600

47 Tata Consultancy Services Ltd TCS 250

48 Tata Power Co. Ltd. TATAPOWER 800

49 Tata Tea Ltd. TATATEA 550

50 Tata Motors Ltd. TATAMOTORS 825

51 Tata Iron and Steel Co. Ltd. TISCO 1350

52 Union Bank of India UNIONBANK 4200

53 Wipro Ltd. WIPRO 600

3.6 Options contract

It is a contract that goes a step further and provides the buyer of the option a right

without any obligation to fulfill the terms of the contract.

Key features of an options contract

Gives right to buy or sell

It is not an obligation

Consideration is by paying a premium

Quantity is defined

3.7 Option terminology

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. A contract gives the

holder the right to buy or sell shares at the specified price.

Buyer 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.

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.

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.

In-the-money option: An in-the-money (ITM) option is an option that would lead

to a positive Cash flow to the holder if it were exercised immediately. A call

option on the index is said to be in-the-money when the current index stands at a

level higher than the strike price (i.e. spot price > strike price). If the index is

much higher than the strike price, the call is said to be deep ITM. In the case of a

put, the put is ITM if the index is below the strike price.

At-the-money option: An at-the-money (ATM) option is an option that would

lead to zero cash flow if it were exercised immediately. An option on the index is

at-the-money when the current index equals the strike price (i.e. spot price =

strike price).

Out-of-the-money option: An out-of-the-money (OTM) option is an option that

would lead to a negative cash flow. A call option on the index is out-of-the-

money when the current index stands at a level which is less than the strike price

(i.e. spot price < strike price). If the index is much lower than the strike price, the

call is said to be deep OTM. In the case of a put, the put is OTM if the index is

above the strike price.

4. Volatile markets

Volatile markets are characterized by wide price fluctuations and considerable

trading volume.

Reason for volatile market condition

Few reasons for market volatility are:

Change in interest rate policy.

Arbitrage causes volatility. Arbitrage is the simultaneous or almost simultaneous

buying and selling of an asset to profit from price discrepancies. Arbitrage causes

markets to adjust prices quickly. This has the effect of causing information to be

more quickly assimilated into market prices. This is a curious result because

arbitrage requires no more information than the existence of a price discrepancy.

Another obvious reason for market volatility is dissemination of information and

technology factors. This includes more timely information dissemination,

improved technology to make trades and more kinds of financial instruments. The

faster information is disseminated, the quicker markets can react to both negative

and positive news. Improved trading technology makes it easier to take advantage

of arbitrage opportunities, and the resulting price alignment arbitrage causes.

Finally, more kinds of financial instruments allow investors more opportunity to

move their money to more kinds of investment positions when conditions change.

Most people would say that new information in general causes volatility

5. Characteristics of high volatile market

Volatility has certain characteristics. They are as follows

Cyclical

Persistency

Mean reversion.

5.1 Volatility is cyclical

Volatility tends to run in cycles, increasing and peaking out, then decreasing until

it bottoms out and begins the process all over again. Many traders believe volatility is

more predictable than price (because of this cyclical characteristic) and have developed

models to capitalize on this phenomenon.

5.2 Volatility is persistent

Persistency is simply the ability of volatility to follow through from one day to the

next, suggesting the volatility that exists today will likely to exist tomorrow. That is, if

the market is highly volatile today, it will most likely be volatile tomorrow; conversely, if

the market not volatile today it will likely not be volatile tomorrow. By the same token, if

volatility is increasing today, it will likely continue to increase tomorrow, and if volatility

is decreasing today, it will likely continue to decrease tomorrow.

6. Identification of volatile market

The market is highly volatile for the month of January & February in the year

2005, so I had taken these periods as a highly volatile market for my study. The details of

indices for the period are as follows.

JANUARY INDEX MOVEMENTS

Date Open High Low Close

3-Jan-05 2080 2118.6 2080 2115

4-Jan-05 2116.95 2120.15 2100.55 2103.75

5-Jan-05 2103.75 2105.1 1990.15 2032.2

6-Jan-05 2031.55 2035.65 1984.25 1998.35

7-Jan-05 1998.25 2021.45 1992.55 2015.5

10-Jan-05 2016.75 2025.9 1974.8 1982

11-Jan-05 1982.7 1988.9 1947.35 1952.05

12-Jan-05 1953.6 1966.65 1900.85 1913.6

13-Jan-05 1922.5 1963.4 1916.95 1954.55

14-Jan-05 1954.9 1961.4 1922.85 1931.1

17-Jan-05 1931.75 1944.55 1902.45 1932.9

18-Jan-05 1933.05 1956.95 1925.35 1934.05

19-Jan-05 1934.1 1945.65 1922.35 1926.65

20-Jan-05 1928.1 1940.95 1900.05 1925.3

24-Jan-05 1925.3 1932.75 1902.9 1909

25-Jan-05 1908.85 1934.25 1894.4 1931.85

27-Jan-05 1931.9 1961.75 1929 1955

28-Jan-05 1955.25 2014.25 1950.85 2008.3

31-Jan-05 2008.45 2060.4 2006.35 2057.6

On these above dates the market is highly volatile on January 31st

Market movements in the month of January

1860

18851910

19351960

19852010

20352060

20852110

2135

4-Jan-05

5-Jan-05

6-Jan-05

7-Jan-05

10-Jan-05

11-Jan-05

12-Jan-05

13-Jan-05

14-Jan-05

17-Jan-05

18-Jan-05

19-Jan-05

20-Jan-05

24-Jan-05

25-Jan-05

27-Jan-05

28-Jan-05

31-Jan-05

date

mar

ket m

ovem

ents

Market movement on January 31st

31-Jan-05

1960

1980

2000

2020

2040

2060

2080

1 2 3 4

31-Jan-05

February index movements

Date Open High Low Close

1-Feb-05 2057.75 2072.5 2045.25 2059.85

2-Feb-05 2062.15 2074.5 2045.5 2052.25

3-Feb-05 2052.35 2083.75 2052.35 2079.45

4-Feb-05 2079.4 2099.2 2060.8 2077.95

7-Feb-05 2097.45 2098 2049.85 2055.1

8-Feb-05 2055 2065 2043.6 2055.15

9-Feb-05 2055.2 2077.7 2055.2 2070

10-Feb-05 2070.1 2075.1 2049.85 2063.35

11-Feb-05 2063.35 2084.5 2063.35 2082.05

14-Feb-05 2083.05 2110.15 2083.05 2098.25

15-Feb-05 2098.25 2101.6 2081.2 2089.95

16-Feb-05 2090 2103.4 2059.45 2068.8

17-Feb-05 2069.1 2069.15 2045.85 2061.9

18-Feb-05 2062.45 2076.7 2048.85 2055.55

21-Feb-05 2055.15 2065.75 2039.9 2043.2

22-Feb-05 2043.4 2061.65 2036.6 2058.4

23-Feb-05 2058.7 2065.15 2051.35 2057.1

24-Feb-05 2057.75 2070.5 2052.4 2055.3

25-Feb-05 2057.3 2081.85 2051.2 2060.9

28-Feb-05 2061.2 2106.2 2047.7 2103.25

Identification of volatile market

Date Open High

Difference between Open and High Percentage Low

Difference between Open and Low

Difference between High and Low Close

1-02-052057.75 2072.5 14.75 0.712% 2045.25 -12.5 -27.25 2059.9

2-02-052062.15 2074.5 12.35 0.595% 2045.5 -16.65 -29 2052.3

3-02-052052.35 2083.75 31.4 1.507% 2052.35 0 -31.4 2079.5

4-02-052079.4 2099.2 19.8 0.943% 2060.8 -18.6 -38.4 2078

7-02-052097.45 2098 0.55 0.026% 2049.85 -47.6 -48.15 2055.1

8-02-05 2055 2065 10 0.484% 2043.6 -11.4 -21.4 2055.2

9-02-052055.2 2077.7 22.5 1.083% 2055.2 0 -22.5 2070

10-02-05

2070.1 2075.1 5 0.241% 2049.85 -20.25 -25.25 2063.4

11-02-05

2063.35 2084.5 21.15 1.015% 2063.35 0 -21.15 2082.1

14-02-05

2083.05 2110.15 27.1 1.284% 2083.05 0 -27.1 2098.3

15-02-05

2098.25 2101.6 3.35 0.159% 2081.2 -17.05 -20.4 2090

16-02-05 2090 2103.4 13.4 0.63% 2059.5 -30.55 -44 206917-02-05

2069.1 2069.15 0.05 0.002% 2045.85 -23.25 -23.3 2061.9

18-02-05

2062.45 2076.7 14.25 0.686% 2048.85 -13.6 -27.85 2055.6

21-02-05

2055.15 2065.75 10.6 0.513% 2039.9 -15.25 -25.85 2043.2

22-02-05

2043.4 2061.65 18.25 0.885% 2036.6 -6.8 -25.05 2058.4

23-02-05

2058.7 2065.15 6.45 0.312% 2051.35 -7.35 -13.8 2057.1

24-02-05

2057.75 2070.5 12.75 0.616% 2052.4 -5.35 -18.1 2055.3

25-02-05 2057.3 2081.85 24.55 1.179% 2051.2 -6.1 -30.65 2060.9

28-02-05 2061.2 2106.2 45 2.13% 2047.7 -13.5 -58.5 2103

Date op-close %gehi - close low-close

1-02-05 2.10.102%

-12.65 14.6

2-02-05 -9.9

-0.482%

-22.25 6.75

3-02-05 27.11.303% -4.3 27.1

4-02-05 -1.45

-0.070%

-21.25 17.15

7-02-05 -42.35

-2.061% -42.9 5.25

8-02-05 0.150.007% -9.85 11.55

9-02-05 14.80.715% -7.7 14.8

10-02-05 -6.75

-0.327%

-11.75 13.5

11-02-05 18.70.898% -2.45 18.7

14-02-05 15.2 0.724 -11.9 15.2

%

15-02-05 -8.3

-0.397%

-11.65 8.75

16-02-05 -21.2

-1.025% -34.6 9.35

17-02-05 -7.2

-0.349% -7.25 16.05

18-02-05 -6.9

-0.336%

-21.15 6.7

21-02-05 -11.95

-0.585%

-22.55 3.3

22-02-05 150.729% -3.25 21.8

23-02-05 -1.6

-0.078% -8.05 5.75

24-02-05 -2.45

-0.119% -15.2 2.9

25-02-05 3.60.175%

-20.95 9.7

28-02-05 42.051.999% -2.95 55.55

Market movements in the month of February

Market Movements

2020

2030

2040

2050

2060

2070

2080

2090

2100

2110

2120

Date

Nift

y

In the month of February the market is highly volatile on february28th

Market movement on February 28th

28-Feb-05

2061.2

2106.2

2047.7

2103.25

201020202030204020502060207020802090210021102120

1 2 3 4

28-Feb-05

7. Types of securities

Highly volatile securities

Non volatile securities

8. Scientific methods involved in identification of securities

There are several different ways of measuring volatility

Beta calculation of securities.

Standard deviation

Geometric standard deviation

Beta coefficient

R-squared

10-day average true range (ATR).

Average range (high – low)

True range

8.1 Average range

One of the easiest ways is to take the average range (high – low) over a given

period. The number of days (or hours, or weeks, etc.) will give a picture of the volatility

over that time period. A five-day average range calculation will give an idea of how

volatile the market has been the past week, but it won't reflect anything about the past six

months. A 100-day average range calculation would reflect volatility over a much longer

period.

.

8.2 Standard Deviation

The most common and basic measure of volatility is called standard deviation,

where volatility is measured in relation to a defined time frame. It takes into account the

way a security has performed in the past, and estimates the probability as the whether it

will perform in the same manner in the future. The most common way to calculate

standard deviation is to determine the deviation from an average monthly return over a

36-month time period, and then annualize that number. As a general rule, the higher the

standard deviation, the more volatile the security. However, standard deviation is not a

'relative measure', and has no base reference point by which to compare. Thus, the logical

way to use standard deviation is to compare one security's standard deviation to that of a

similar security.

8.3 The Beta Coefficient

Beta is used to measure the volatility of a security in relation to that of the stock

market as a whole. To determine the beta of any security, you need to know the security's

monthly returns and the returns of a benchmark index. For stocks and mutual funds that

hold stocks, the Standard & Poor's 500 Stock Index is the most frequently used index,

and is assigned a beta coefficient of one (1.0). For bonds and bond mutual funds, the

Lehman Brothers Aggregate Bond Index is the most prevalent benchmark, and is also

assigned a beta coefficient of one also. Any security with a beta higher than one is more

volatile than the relative market index, while any security with a beta less than one is less

volatile than the index. Like standard deviation, beta is typically measured using data

over a 36-month period. Beta is useful in providing a measurement of a security's past

volatility relative a specific benchmark or index, but it's important to verify that the most

relevant benchmark is used.

8.4 R-Squared

Whenever beta is used to measure volatility, you are likely to find an R-squared

statistic as well. Where the beta coefficient to measure volatility, R-squared measures the

reliability of the information used to determine beta. The lower the R-squared figure (on

a scale of 1 — 100), the less reliable the information.

8.5 Geometric Standard Deviation

It has become customary in the Mechanical Investing community to measure

volatility with a statistic known as the Geometric Standard Deviation (GSD), which is

defined as the exponential of the annual volatility:

GSD = exp[ ].

The notation GSD(M) is occasionally used to indicate that the GSD was calculated from

monthly data. By extension, the notations GSD(A) and GSD(D) mean that the GSD was

calculated from annual and daily data, respectively. Needless to say, GSD(A) is highly

unreliable because of the paucity of data from which it is calculated. In a later section we

shall see exactly how reliable these measures are, by studying their sampling variation.

By convention, CAGR and GSD figures are reported in "percentage" terms, where the

following relationships apply:

CAGR% = 100( CAGR – 1 ),

GSD% = 100( GSD – 1 ).

To summarize, when setting out to measure volatility or growth, three decisions need to

be made in advance: (a) the units in which time is measured, (b) the number of

observations per time unit, and (c) whether the result is to be given in instantaneous or

annualized form. Confusion can be avoided only when all three decisions are made with

total clarity.

9. Identification of securities

Securities identification for the month of January

DATE SYMBOL

UNDERLYING DAILY VOLATILITY

UNDERLYING ANNUALISED VOLATILITY

31-1-05 BANKINDIA 4.823796 92.15848 7.679874 2.8560776731-1-05 SYNDIBANK 4.65439 88.922 7.410167 2.7557767531-1-05 ANDHRABANK 4.123097 78.77165 6.564304 2.4412072531-1-05 ARVINDMILL 3.69901 70.66948 5.889123 2.1901130831-1-05 CANBK 3.909708 74.69487 6.224572 2.3148643331-1-05 UNIONBANK 3.368426 64.35369 5.362807 1.99438117

31-1-05 BANKBARODA 3.280567 62.67515 5.222929 1.9423620831-1-05 MASTEK 3.102795 59.27882 4.939901 1.8371063331-1-05 POLARIS 3.022807 57.75064 4.812553 1.7897462531-1-05 TATAPOWER 3.248215 62.05706 5.171422 1.9232066731-1-05 SCI 2.991383 57.15029 4.762524 1.7711407531-1-05 ORIENTBANK 2.688226 51.3585 4.279875 1.5916485831-1-05 SBIN 2.605544 49.77885 4.148238 1.5426936731-1-05 PNB 3.412083 65.18775 5.432313 2.0202296731-1-05 GAIL 2.659431 50.80836 4.23403 1.5745988331-1-05 CIPLA 2.519124 48.12779 4.010649 1.4915254231-1-05 MARUTI 2.634009 50.32266 4.193555 1.5595461731-1-05 NATIONALUM 2.364218 45.16832 3.764026 1.3998083331-1-05 NTPC 2.404578 45.9394 3.828283 1.4237049231-1-05 HINDPETRO 2.309823 44.12911 3.677425 1.3676024231-1-05 REL 2.616271 49.98378 4.165315 1.5490439231-1-05 ITC 2.646245 50.55644 4.213036 1.5667913331-1-05 HDFCBANK 2.551352 48.7435 4.061959 1.510606531-1-05 GUJAMBCEM 2.592657 49.53263 4.12772 1.535062531-1-05 MTNL 2.898799 55.38148 4.615123 1.71632431-1-05 I-FLEX 2.359378 45.07586 3.756321 1.3969433331-1-05 HEROHONDA 2.654795 50.71978 4.226649 1.5718535831-1-05 SATYAMCOMP 2.405864 45.96397 3.830331 1.4244670831-1-05 M&M 2.192303 41.88389 3.490324 1.2980209231-1-05 IPCL 2.045748 39.08396 3.256997 1.2112486731-1-05 ACC 2.292868 43.80519 3.650432 1.3575643331-1-05 ICICIBANK 1.919359 36.6693 3.055775 1.1364160831-1-05 RANBAXY 2.253274 43.04873 3.587394 1.3341202531-1-05 BPCL 2.443998 46.69252 3.891043 1.44704508

31-1-05 TISCO 2.029524 38.77401 3.231168 1.201643531-1-05 WIPRO 2.121333 40.528 3.377334 1.2560006731-1-05 BAJAJAUTO 2.21483 42.31426 3.526189 1.311358531-1-05 TATAMOTORS 1.993018 38.07656 3.173047 1.1800286731-1-05 TATATEA 1.825975 34.8852 2.9071 1.0811248331-1-05 BEL 1.643575 31.40046 2.616705 0.9731296731-1-05 INFOSYSTCH 1.897003 36.24219 3.020183 1.1231796731-1-05 HCLTECH 1.798322 34.35689 2.863074 1.0647518331-1-05 DRREDDY 1.742509 33.29059 2.774216 1.0317065831-1-05 HINDALC0 1.810941 34.59798 2.883165 1.0722242531-1-05 IOC 1.626786 31.07971 2.589976 0.9631898331-1-05 BHEL 1.888885 36.0871 3.007259 1.1183736731-1-05 RELIANCE 1.60721 30.7057 2.558808 0.9515983331-1-05 CNXIT 1.677221 32.04326 2.670271 0.9930502531-1-05 HINDLEVER 1.752933 33.48973 2.790811 1.0378780831-1-05 GRASIM 1.585475 30.29046 2.524205 0.9387297531-1-05 TCS 1.591563 30.40678 2.533898 0.9423349231-1-05 HDFC 1.752687 33.48504 2.79042 1.0377326731-1-05 NIFTY 1.413499 27.00486 2.250405 0.8369062531-1-05 ONGC 1.254692 23.97086 1.997571 0.7428792531-1-05 NSE10YZC 0.734767 14.0377 1.169808 0.4350413331-1-05 NSETB91D 0.517025 9.877749 0.823146 0.3061207531-1-05 NSE10Y06 0.51106 9.763789 0.813649 0.30258908

FUTURES VOLATILITY FUTURES ANNUALISED VOLATILITY Final volatility

4.809467 91.88475 7.657062 4.800985 1.944907

4.739768 90.55314 7.546095 4.790318 2.0345414.216492 80.55597 6.712998 4.27179 1.8305833.811807 72.82448 6.068706 3.878593 1.688483.826831 73.1115 6.092625 3.777761 1.4628963.514454 67.14355 5.595296 3.600915 1.6065333.41875 65.31514 5.442928 3.500566 1.5582043.247103 62.03581 5.169651 3.332545 1.4954383.1744 60.64683 5.053902 3.264156 1.474413.158247 60.33822 5.028185 3.104979 1.1817723.027994 57.84974 4.820811 3.049671 1.278532.86699 54.77377 4.564481 2.972833 1.3811842.802188 53.53572 4.46131 2.918616 1.3759233.031505 57.91683 4.826402 2.806173 0.7859432.698241 51.54982 4.295819 2.72122 1.1466212.593143 49.54193 4.128495 2.636969 1.1454442.604842 49.76544 4.14712 2.587574 1.0280282.49412 47.6501 3.970841 2.571033 1.1712252.4841 47.45866 3.954888 2.531183 1.1074782.447403 46.75758 3.896465 2.528862 1.161262.538711 48.50201 4.041834 2.49279 0.9437462.547011 48.66057 4.055048 2.488256 0.9214652.506722 47.89086 3.990905 2.480298 0.9696922.521281 48.16902 4.014085 2.479022 0.943962.630356 50.25288 4.18774 2.471416 0.7550922.401469 45.88001 3.823334 2.426391 1.0294472.506194 47.88077 3.990064 2.418211 0.8463572.366134 45.20492 3.767077 2.34261 0.9181432.276861 43.49937 3.624948 2.326927 1.0289062.222136 42.45386 3.537821 2.326573 1.115324

2.309996 44.13241 3.677701 2.320136 0.9625722.104468 40.2058 3.350483 2.214067 1.0776512.21547 42.32649 3.527207 2.193087 0.8589672.252484 43.03366 3.586138 2.139093 0.6920482.085943 39.85189 3.320991 2.119348 0.9177042.082119 39.77883 3.314902 2.058902 0.8029012.06249 39.40382 3.283651 1.972293 0.6609341.950185 37.25824 3.104853 1.924824 0.7447961.887168 36.0543 3.004525 1.9234 0.8422751.817383 34.72105 2.893421 1.920291 0.9471611.894873 36.20151 3.016792 1.893613 0.7704331.853643 35.4138 2.95115 1.886398 0.8216461.806343 34.51013 2.875844 1.844137 0.8124311.817348 34.72038 2.893365 1.821141 0.7489171.712828 32.72353 2.726961 1.763771 0.8005821.805952 34.50267 2.875222 1.756849 0.6384751.688983 32.26797 2.688997 1.737399 0.7858011.67777 32.05375 2.671146 1.678095 0.6850451.66763 31.86003 2.655002 1.617124 0.5792461.583032 30.24378 2.520315 1.581586 0.6428561.573663 30.06479 2.505399 1.563064 0.620731.600695 30.58123 2.548436 1.510703 0.4729711.426953 27.2619 2.271825 1.434919 0.5980131.345791 25.71129 2.142608 1.399729 0.6568490.665337 12.71125 1.059271 0.624229 0.1891880.470852 8.995614 0.749635 0.443514 0.1373930.434825 8.307326 0.692277 0.389688 0.087099

Securities identification for the month of February

DATE SYMBOL

UNDERLYING DAILY VOLATILITY

UNDERLYING ANNUALISED VOLATILITY

28-Feb-05 NSETB91D 0.318904 6.092646 0.507721 0.18881728-Feb-05 NSE10Y06 0.368082 7.032202 0.586017 0.21793528-Feb-05 NSE10YZC 0.559194 10.68339 0.890283 0.33108928-Feb-05 NIFTY 1.02725 19.62559 1.635466 0.60821628-Feb-05 ONGC 1.179421 22.53281 1.877734 0.69831328-Feb-05 GRASIM 1.196704 22.86299 1.905249 0.70854528-Feb-05 CNXIT 1.307356 24.977 2.081417 0.77406128-Feb-05 TCS 1.318359 25.18721 2.098934 0.78057528-Feb-05 HINDALC0 1.32757 25.36319 2.113599 0.78602928-Feb-05 RELIANCE 1.375077 26.27082 2.189235 0.81415828-Feb-05 DRREDDY 1.448611 27.67567 2.306306 0.85769528-Feb-05 TATAMOTORS 1.534429 29.31522 2.442935 0.90850628-Feb-05 IOC 1.539658 29.41512 2.45126 0.91160228-Feb-05 RANBAXY 1.542023 29.46031 2.455026 0.91300328-Feb-05 TISCO 1.548294 29.58012 2.46501 0.91671628-Feb-05 NATIONALUM 1.556019 29.7277 2.477309 0.9212928-Feb-05 INFOSYSTCH 1.59107 30.39734 2.533112 0.94204228-Feb-05 NTPC 1.59162 30.40785 2.533987 0.94236728-Feb-05 ITC 1.60338 30.63253 2.55271 0.9493328-Feb-05 ICICIBANK 1.61902 30.93133 2.577611 0.95859128-Feb-05 HDFC 1.619342 30.93749 2.578124 0.95878228-Feb-05 HCLTECH 1.628412 31.11076 2.592563 0.96415128-Feb-05 ACC 1.636131 31.25823 2.604853 0.968722

28-Feb-05 M&M 1.661675 31.74626 2.645522 0.98384728-Feb-05 BAJAJAUTO 1.670042 31.90612 2.658843 0.98880128-Feb-05 BEL 1.675728 32.01473 2.667894 0.99216628-Feb-05 CIPLA 1.708552 32.64184 2.720153 1.01160128-Feb-05 BHEL 1.741348 33.2684 2.772367 1.03101928-Feb-05 TATATEA 1.773471 33.88213 2.82351 1.05003928-Feb-05 WIPRO 1.77514 33.914 2.826166 1.05102628-Feb-05 IPCL 1.775798 33.92657 2.827214 1.05141628-Feb-05 MTNL 1.814013 34.65667 2.888056 1.07404328-Feb-05 SATYAMCOMP 1.819592 34.76326 2.896938 1.07734628-Feb-05 HINDPETRO 1.836468 35.08568 2.923806 1.08733828-Feb-05 GUJAMBCEM 1.845992 35.26763 2.938969 1.09297728-Feb-05 I-FLEX 1.869849 35.72342 2.976951 1.10710228-Feb-05 ORIENTBANK 1.874766 35.81735 2.984779 1.11001328-Feb-05 REL 1.875299 35.82754 2.985628 1.11032928-Feb-05 BPCL 1.933961 36.94827 3.079023 1.14506228-Feb-05 HDFCBANK 1.942202 37.10571 3.092143 1.14994128-Feb-05 POLARIS 1.951512 37.28359 3.106965 1.15545328-Feb-05 SCI 2.02046 38.60084 3.216737 1.19627728-Feb-05 SBIN 2.078229 39.70452 3.30871 1.23048128-Feb-05 MARUTI 2.086856 39.86933 3.322444 1.23558828-Feb-05 TATAPOWER 2.086968 39.87147 3.322622 1.23565428-Feb-05 HINDLEVER 2.095563 40.03567 3.336306 1.24074328-Feb-05 GAIL 2.134789 40.78509 3.398757 1.26396828-Feb-05 MASTEK 2.143458 40.9507 3.412559 1.26910128-Feb-05 HEROHONDA 2.323041 44.38164 3.69847 1.37542928-Feb-05 PNB 2.356346 45.01793 3.751494 1.39514828-Feb-05 BANKBARODA 2.603147 49.73306 4.144422 1.541275

28-Feb-05 CANBK 2.765265 52.83031 4.402526 1.63726128-Feb-05 ARVINDMILL 2.878989 55.00301 4.583584 1.70459528-Feb-05 ANDHRABANK 3.16201 60.41012 5.034176 1.87216628-Feb-05 SYNDIBANK 3.35685 64.13253 5.344378 1.98752828-Feb-05 BANKINDIA 3.383669 64.64491 5.387076 2.00340728-Feb-05 UNIONBANK 3.411358 65.17391 5.431159 2.019801

On these particular days BANK OF INDIA and PUNJAB NATIONAL BANK are the

highly volatile securities because it is characterized with high price fluctuations and a

good trading volume and TCS is the low volatile security with low price fluctuation and a

considerable trading volume. for the above reasons I have selected these securities.

10. Comparison of securities with the market

Behavior of volatile securities when the market is volatile

SYMBOL OPEN HIGH LOW CLOSEPNB 442 463.35 437 457.5S&P CNX NIFTY 2061.2 2106.2 2047.7 2103.25BANKINDIA 84 89.9 83.8 88.85S&P CNX NIFTY 2061.2 2106.2 2047.7 2103.25

PNB VS S&P CNXNIFTY 50

BANK OF INDIA VS S&P CNXNIFTY 50

Behavior of nonvolatile securities when the market is volatile

SYMBOL OPEN HIGH LOW CLOSETCS 1379 1385 1340 1380.9

S&P CNX NIFTY 50 2061.2 2106.2 2047.7 2103.25

TCS VS S&P CNXNIFTY 50

11. Derivative strategies

After classifying the securities, we need to identify the suitable derivative strategies for

volatile market movements.

In general, the following derivative strategies are prevalent in the market

Bull spread with call option

Bull spread with put option

Bear spread with call option

Bear spread with put option

Bull call spread

Bear put spread

Strangle

Straddle

Box spread

Butterfly spread with calls

Butterfly spread with calls

The pay-off for the above strategies are calculated and we will be identifying the suitable

derivative strategy(s) for volatile market. The same exercise would be followed for all

three classification viz., volatile, low volatile and normal securities.

12.1 Straddle

A straddle consists of a call and a put option with the same exercise price and the

same expiration. The buyer of a straddle buys the call and put, while the seller of a

straddle sells the same two options.

12.2 Strangle

Like a straddle, strangle consists of a put and a call option with the same

expiration date but with different exercise price. In a strangle, the call option has an

exercise price above the stock price and the put option has an exercise price below the

stock price.

12.3 Bull spread with call option

A bull spread in the options market is a combination of options designed to profit

if the price of the underlying good rises. A bull spread utilizing call options requires two

calls with the same underlying stock and the same expiration date, but with the different

exercise prices. The buyer of a bull spread buys a call with an exercise price below the

stock price and sells a call option with an exercise price above the stock price. This

spread is a bull spread because the trader hopes to profit from a price rise in the stock.

The trade is a spread because it involves buying one option and selling a related option.

12.4 Bear spread with call option

A bear spread in the options market is a combination of options designed to profit

from falling stock prices. A bear spread utilizing call options requires two calls with the

same underlying stock and the same expiration date. The two calls however have

different exercise prices. To execute a bear spread with calls, a trader would sell the call

with the lower exercise price and buy the call with higher exercise price. In other words,

the bear spread with calls is just the short position to the bull spread with calls.

12.5 Bull spread with put option

A bull spread utilizing put options requires two calls with the same underlying

stock and the same expiration date, but with the different exercise prices. The bull spread

consists of buying a put option with a lower exercise price and selling the put option with

higher exercise price.

12.6 Bear spread with put option

A bear spread utilizing put options requires two calls with the same underlying

stock and the same expiration date, but with the different exercise prices. The bear spread

consists of buying a put option with a higher exercise price and selling the put option

with lower exercise price.

12.7 Box spread

A box spread consist of a bull spread with calls plus a bear spread with puts, with

the two spreads having the same pairs of exercise prices.

12.8 Butterfly spread with call option

A butterfly spread can be executed by using three calls with the same expiration

date on the same underlying stock.

The long trader buys one call with a low exercise price, buys one call with high

exercise price, and sells two calls with intermediate exercise price.

The short trader sells one call with a low exercise price, sells one call with high

exercise price, and buying two calls with intermediate exercise price.

12.9 Butterfly spread with put option

A butterfly spread can be executed by using three calls with the same expiration

date on the same underlying stock.

The long trader buys a put with a low exercise price, buys one put with high

exercise price, and sells two calls with intermediate exercise price.

The short trader sells a put with a low exercise price, sells a put with high exercise

price, and buys two puts with intermediate exercise price.

12. Calculation of pay offs

Payoffs for volatile security

Straddle

SCRIPT NAME PNB

DATE OPTION STRIKE COST SELLLING SP-CP LOTSIZE TOTAL

PRICE PRICE PRICE

28-Feb-

05 CA 420 23.5 37 13.5 1200 16200

28-Feb-

05 PA 420 20.25 12.3 -7.95 1200 -9540

6660

Strangle

SCRIPT NAME PNB

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 CA 420 23.5 37 13.5 1200 16200

28-Feb-

05 PA 400 10.9 5.5 -5.4 1200 -6480

9720

Bull call spread

SCRIPT NAME PNB

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 CA 420 23.5 37 13.5 1200 16200

28-Feb-

05 CA 440 10 19.25 9.25 1200 11100

27300

Bear put spread

SCRIPT NAME PNB

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 PA 420 20.25 12.3 -7.95 1200 -9540

28-Feb-

05 PA 400 10.9 5.5 -5.4 1200 -6480

-16020

Bull spread with call option

SCRIPT NAME PNB

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 CA 420 23.5 37 13.5 1200 16200

28-Feb-

05 CA 460 6.1 8.85 2.75 1200 3300

19500

Bear spread with put option

SCRIPT NAME PNB

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 PA 400 10.9 5.5 -5.4 1200 -6480

28-Feb-

05 PA 450 25.25 26.5 1.25 1200 1500

-4980

Box spread

SCRIPT NAME PNB

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 CA 420 23.5 37 13.5 1200 16200

28-Feb-

05 CA 460 6.1 8.85 2.75 1200 3300

28-Feb-

05 PA 400 10.9 5.5 -5.4 1200 -6480

28-Feb-

05 PA 450 25.25 26.5 1.25 1200 1500

14520

Butterfly spread with call option

SCRIPT NAME PNB

DATE OPTION STRIKE COST SELLLING SP-CP LOTSIZE TOTAL

PRICE PRICE PRICE

28-Feb-

05 CA 430 13.5 28 14.5 1200 17400

28-Feb-

05 CA 410 31.8 31.8 0 1200 0

28-Feb-

05 CA 420 23.5 21.1 -2.4 2400 -5760

11640

Butterfly spread with put option

SCRIPT NAME PNB

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 PA 440 23.3 21 -2.3 1200 -2760

28-Feb-

05 PA 420 20.25 12.3 -7.95 1200 -9540

28-Feb-

05 PA 400 10.9 5.5 -5.4 2400 -12960

-25260

Pay off for low volatile security

Straddle

SCRIPT NAME TCS

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 CA 1350 53.5 62.75 9.25 250 2312.5

28-Feb-

05 PA 1350 44 23.6 -20.4 250 -5100

-2788

Strangle

SCRIPT NAME TCS

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 CA 1350 53.5 62.75 9.25 250 2312.5

28-Feb-

05 PA 1290 16 15 -1 250 -250

2062.5

Bull call spread

SCRIPT NAME TCS

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 CA 1350 53.5 62.75 9.25 250 2312.5

28-Feb-

05 CA 1440 14 15.8 1.8 250 450

2762.5

Bear put spread

SCRIPT NAME TCS

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 PA 1290 16 15 -1 250 -250

28-Feb-

05 PA 1350 44 23.6 -20.4 250 -5100

-5350

Bull spread with call option

SCRIPT NAME TCS

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 CA 1350 53.5 62.75 9.25 250 2312.5

28-Feb-

05 CA 1410 26 27.45 1.45 250 362.5

2675

Bear spread with put option

SCRIPT NAME TCS

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 PA 1350 44 23.6 -20.4 250 -5100

28-Feb-

05 PA 1380 35 35 0 250 0

-5100

Box spread

SCRIPT NAME TCS

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 CA 1350 53.5 62.75 9.25 250 2312.5

28-Feb- CA 1410 26 27.45 1.45 250 362.5

05

28-Feb-

05 PA 1350 44 23.6 -20.4 250 -5100

28-Feb-

05 PA 1380 35 35 0 250 0

-2425

Butterfly spread with call option

SCRIPT NAME TCS

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-05 CA 1470 15.95 15.95 0 250 0

28-Feb-05 CA 1410 26 27.45 1.45 250 362.5

28-Feb-05 CA 1440 14 15.8 1.8 500 900

1262.5

Butterfly spread with put option

SCRIPT NAME TCS

DATE OPTION

STRIKE PRICE

COST PRICE

SELLLING PRICE SP-CP LOTSIZE TOTAL

28-Feb-

05 PA 1470 15.95 15.95 0 250 0

28-Feb-

05 PA 1410 26 27.45 1.45 250 362.5

28-Feb-

05 PA 1440 14 15.8 1.8 500 900

1262.5

13. Conclusion and Recommendations

The main aim of this project work is to find out the best strategy that gives

maximum pay offs to the investor in the volatile market condition. The

payoff for both volatile and non – volatile securities are calculated and the

best strategy for the volatile security in the volatile market condition after

taking in to following constraints such as brokerage charges, and a

supportive strategy that will not make loss to the investor.

As per the payoffs calculated for the volatile security in the volatile market

condition (i.e. Pnb) the best strategy would be box spread, which has two-

call option, and two put option, and it gives the maximum payoff.

The best strategy for non-volatile security (i.e. Tcs) in the volatile market

condition would be strangle because it has both call and put option so the

possibility of incurring loss is comparatively low, and the second best

strategy would be bull call spread.