Measuring Option Volatality using option greeks

8/14/2019 Measuring Option Volatality using option greeks

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KAILASH.R.

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SYNOPSISONMEASURING OPTION VOLATALITY

USING OPTION GREEKS

MASTER OF BUSINESS ADMINISTRATION

Submitted by:

KAILASH.R.S

REG.NO 08KXCM6017

Under the guidance of

DR. V.PRABHU DEVDIRECTOR

SURANA COLLEGE CENTRE FOR POST

GRADUATE STUDIES

KENGERI SATELLITE TOWN

BANGALORE

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2009 2010

MEASURING OPTION VOLATALITY USING OPTION GREEKS

INTRODUCTION

Option and Futures are a result of unrelenting search for better financial

instruments. They belong to a class of instruments referred to DERIVATIVES

because they derive their value from an underlying commodity for a financial

asset. The underlying financial asset can range from products like stocks, bonds,

gold, silver, currencies.

An option means a choice. An option in a financial market is created through a

financial contract. This financial contract gives the right to its holder to enter into atrade at or before a future specified date. The underlying asset on option includes

STOCKS STOCK OPTION

STOCK INDICES INDEX OPTION

FOREIGN CURRENCIES CURRENCY OPTION

COMMODITIES AND FUTURE FUTURE OPTION

MEANING OF OPTION

An option is a contract in which the seller of a contract grants the buyer, the rightto purchase from the seller a designated instrument or an asset at a specified price

which is agreed upon at a time of entering the contract. It is important to note that

the option buyer has the right but an obligation to buy or sell. If the buyer decides

to exercise his right the seller of option has an obligation to deliver or to take

delivery of underlying asset.

TERMS USED IN STUDY

Call option: An option is called a call option, if the writer gives the buyer of the

option the right to purchase from him the underlying asset.

Put option: An option is said to be a put option if the writer gives the buyer of

the option the right to sell the underlying asset.

Strike price: At the time of entering in to the contract, the parties agree upon a

price at which an asset might be bought or sold.

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Expiration period: At the time of introducing an option contract, the exchange

specifies the period during which the option can be exercised or traded, this period

will not exceed more than nine months.Option premium: This is the amount which the buyer of the option has to pay to

the option writer to induce him to accept the risk associated with the contract.

Volatility is the fluctuation of the underlying asset because of the external forces in

the market, because of the company, or because of the price of the shares. This

volatility can be measured using the option Greeks.

STATEMENT OF THE PROBLEMOptions value or option premium changes with movements in the underlying

stock price, risk free rate, exercise price, time to maturity, variance of the returnsetc which affects the market participants like general investors and retail traders

profit. Volatility is one of the most important inputs in the pricing of an option.

Measuring the volatility using the option Greeks is the consideration of the study.

OBJECTIVES OF THE STUDY

To measure the option volatility using option Greeks.

To find out the impact of fluctuations of stock price, exercise price, time to

maturity, risk free rate, variance of the returns etc on the option premium. To compare the theoretical option values with the actual option values in

order to find out the deviations caused due to volatility.

Hypothesis to be tested:

H0 =actual and theoretical volatilities does not differ significantly.

H1 = actual and theoretical volatilities differ significantly

RESEARCH METHODOLGY

The objective of the study is to find the efficiency of the market participants in

forecasting the implied volatility using historical volatility. This is done by

considering 17 companies from NIFTY 50 companies 9 from banking sector

and 8 from banking pharmaceutical sector and their respective options from two

different industries i.e., banking and the pharmaceutical industries which are

consistently traded during the period of one month Delta, Gamma, Theta, and

Rho.

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Using the different factors like strike price, share price, risk free rate of return

and theoretical volatility the values of option Greeks like Delta, Gamma, Theta,

Vega and Rho for all seventeen stocks are calculated. The same is used toanalyze the different stocks. The theoretical volatilities calculated are compared

with the actual volatility. T-TEST is used for find out whether the difference

between the actual and the theoretical values are significant or not.

The findings of the study are the actual and theoretical values of options differ

significantly. The value of call option in case of any stock is completely

influenced by variations in option Greeks

LIMITATIONS OF THE STUDY

The study is limited to 17 companies options only.

The study is limited to a period of one month only.

The study is limited to only 5 option Greeks.

CHAPTER SCHEME

INTRODUCTION

RESEARCH METHODOLOGY

SECTORAL ANALYSIS

DATA INTERPRETATION AND ANALYSIS

FINDINGS,CONCLUSION

SUGGESTIONS

BIBLIOGRAPHY

ICFAI University Publications (IUP) 2009 Edition Financial

Management for Analyst.

ICFAI University Publications (IUP) 2009 Edition Financial markets

Prasanna Chandra, INVESTMENT ANALYSIS AND PORTFOLIO

MANAGEMENT, 2006 edition

WEBSITES

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NSEINDIA.COM website

Money Control.com

GOOGLE search engine.

INTERNAL GUIDE: KAILASH.R.S

Dr.V.PRABHU DEV 4TH SEMESTER MBA

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Measuring Option Volatality using option greeks