Study on Option Strategy Fin Vikash Sinha

8/8/2019 Study on Option Strategy Fin Vikash Sinha

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AT

NARNOLIA SECURITIES LIMITED, RANCHI

PRESENTED BY:

VIKASH KUMAR SINHAPGDM(BM)-FINANCE

2009 2011

ROLL NO.- 9258

INSTITUTE OF INTERNATIONAL BUSINESS & RESEARCH,PUNE


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I was assigned to do my summer project in Narnolia Securities Limited (sub-broker Motilal Oswal ), Ranchi, on the Title Study of Option Strategies andUse of Derivatives.

Narnolia Securities Limited is a reputed organization in the field of share trading.The company keeps its vision and mission always very clear. It works with thenoble purpose of understanding the peoples needs of securing their investment

stable and risk free. The company always believes in complementing its objectiveand motto with hard work and dedication. The Management team always worksin synchronization with the peoples needs and always takes the active consult ofthe companys development. It has always proven its excellence at providingquality services to its customers at every single opportunity they have in theirsight.

The purpose of the study is to study the various option strategies which is used inthe derivative market. In finance an option strategy is the purchase and/or sale ofone or various option positions and possibly an underlying position. There aretotal 20 strategies which I studied during my project.

I can only say that this project report will be very helpful for the company as wellas me, in understanding and fulfilling the customers needs and to attain the

companys goals and objectives.


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To study Indian Derivative Market.

To study different strategies used in Future andOptions.

To suggest the various Option Strategies byconsidering risk appetite and future marketexpectations.


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Lack of awareness about Futures and Options segment:Since the area is not known before it takes lot of time inconvincing people to start investing in Futures and Optionsmarket for hedging purpose.

Mostly people comfortable with traditional brokers: --

As people are doing trading from there respective brokers,they are quite comfortable to trade via phone.

Some respondents are unwilling to talk: - Somerespondents either do not have time or willing does notrespond as they are quite annoyed with the adverse marketconditions they faced so far.

Misleading concepts: - Some people think that Derivativesare too risky and just another name of gamble but they dontknow its not at all that risky for long investor


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y Sampling:

The sampling was collected from 60 client of Narnolia Securities Ltd.

y Data collection:

Primary data

I have taken mostly primary data through questionnaire, customer

interviews and observation methods to get more reliable information.Secondary data

secondary data has also been collected through various secondary sourceslike magazines, books and company profile through websites.


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Derivative is a product whose value is derived from

the value of one or more basic variables i.e.

underlying asset in a contractual manner. The

underlying asset can be equity, forex, commodity orany 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.


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Forward: -A forward contract is a customized contract between twoentities, where settlement takes place on a specific date in the future attoday's pre-agreed price.

Future: -A futures contract is an agreement between two parties tobuy or sell an asset at a certain time in the future at a certain price.Futures contracts are special types of forward contracts in whichexchange act as a mediator and it is also known as standardizedexchange-traded contracts.

Option: -Options are of two types - calls and puts. Calls give the buyerthe right but not the obligation to buy a given quantity of theunderlying asset, at a given price on or before a given future date. Putsgive the buyer the right, but not the obligation to sell a given quantityof the underlying asset at a given price on or before a given date.


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Call option:A call option gives the holder theright but not the obligation to buy an asset by acertain date for a certain price.

Put option:A put option gives the holder theright but not the obligation to sell an asset by acertain date for a certain price.

Option price/premium: Option price is the pricewhich the option buyer pays to the option seller. Itis also referred to as the option premium


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Index options: These options have the index as the underlying.Some options are European while others are American. Likeindex futures contracts, index options contracts are also cashsettled.

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 thespecified price.

Buyer of an option: The buyer of an option is the one who bypaying 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 tosell/buy the asset if the buyer exercises on him. There are two

basic types of options, call options and put options.


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Expiration date: The date specified in the options contract isknown as the expiration date, the exercise date, the strike date orthe maturity.

Strike price: The price specified in the options contract isknown as the strike price or the exercise price.

American options: American options are options that can beexercised at any time upto the expiration date. Most exchange-traded options are American

European options: European options are options that can beexercised only on the expiration date itself. European options are

easier to analyze than American options, and properties of anAmerican option are frequently deduced from those of itsEuropean counterpart.


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Out-of-the-money option: An out-of-the-money (OTM) option is an optionthat would lead to a negative cash flow if it were exercised immediately. A

call option on the index is out-of-the-money when the current index standsat a level which is less than the strike price (i.e. spot price < strike price). Ifthe index is much lower than the strike price, the call is said to be deepOTM. In the case of a put, the put is OTM if the index is above the strikeprice.

Intrinsic value of an option: The option premium can be broken down intotwo components - intrinsic value and time value. The intrinsic value of acall is the amount the option is ITM, if it is ITM. If the call is OTM, itsintrinsic value is zero. Putting it another way, the intrinsic value of a call isMax[0, (St K)] which means the intrinsic value of a call is the greater of0 or (St K). Similarly, the intrinsic value of a put is Max[0, K St],i.e.the greater of 0 or (K St). K is the strike price and St is the spot price.

Time value of an option: The time value of an option is the difference

between its premium and its intrinsic value. Both calls and puts have timevalue. An option that is OTM or ATM has only time value. Usually, themaximum time value exists when the option is ATM. The longer the time toexpiration, the greater is an option's time value, all else equal. At expiration,an option should have no time value.


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In finance an option strategyis the purchase and/or sale ofone or various option positions and possibly an underlying position.Options strategies can favor movements in the underlyingthat are bullish, bearish or neutral. In the case of neutralstrategies, they can be further classified into those that arebullish on volatility and those that are bearish on volatility.

The option positions used can be long and/or short positionsin calls and/or puts at various strikes.


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Bullish Strategies: Bullish options strategies are employed when theoptions trader expects the underlying stock price to move upwards. It is

necessary to assess how high the stock price can go and the time frame inwhich the rally will occur in order to select the optimum trading strategy

Bearish Strategies: Bearish options strategies are the mirror image ofbullish strategies. They are employed when the options trader expects theunderlying stock price to move downwards. It is necessary to assess howlow the stock price can go and the time frame in which the decline will

happen in order to select the optimum trading strategy Neutral Strategies: Neutral strategies in options trading are employed

when the options trader does not know whether the underlying stock pricewill rise or fall. Also known as non-directional strategies, they are sonamed because the potential to profit does not depend on whether theunderlying stock price will go upwards or downwards.

Bullish on volatility: Neutral trading strategies that are bullish onvolatility profit when the underlying stock price experiences big movesupwards or downwards.

Bearish on volatility: Neutral trading strategies that are bearish onvolatility profit when the underlying stock price experiences little or nomovement.


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1. Long Call: If an investor thinks that the value of stock or index

will go up then only he will use this option strategy.2. Short Call :When the investor thinks that the Index or Stock will

go down or it will be bearish in near future then only he uses thisstrategy.

3. Long Put : Buying a Put is the opposite of buying a Call. Investorbuys call when he is bullish but when he is bearish for near futurethen he uses long put strategy.

4. Short Put : Selling a Put is opposite of buying a Put. An investorSells Put when he is Bullish about the stock expects the stock price

will go up or stay sideways at the minimum.

5. Synthetic C all :In this strategy, we purchase a stock since we feelbullish about it but on the other hand we think what happened if theprice of the stock went down.


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y Covered Call : This is often employed when an investor has a short-term neutralto moderately bullishview on the stock he holds. He takes a short position on theCall option to generate income from the option premium.

y Long Combo :A Long Combo is a Bullish strategy. If an investor is expecting theprice of a stock to move up he can do a Long Combo strategy. It involves selling anOTM Put and buying an OTM Call.

y Protective Call : This is a strategy wherein an investor has gone short on a stockand buys a call to hedge. This is an opposite of Synthetic Call (Strategy 3). Aninvestor shorts a stock and buys an ATM or slightly OTM Call.

y Covered Put : This strategy is opposite to a Covered Call. A Covered Call is aneutral to bullish strategy, whereas a Covered Put is a neutral to Bearishstrategy.

y Long Straddle :A Straddle is a volatility strategy and is used when thestock price / index is expected to show large movements. This strategyinvolves buying a call as well as put on the same stock / index for thesame maturity and strike price


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y Short Straddle :A Short Straddle is the opposite of Long Straddle. It isa strategy to be adopted when the investor feels the market will not showmuch movement. He sells a Call and a Put on the same stock / index forthe same maturity and strike price

y Long Strangle :A Strangle is a slight modification to the Straddle tomake it cheaper to execute. This strategy involves the simultaneous buyingof a slightly out-of-the-money (OTM) put and a slightly out-of-the-money(OTM) call of the same underlying stock / index and expiration date

y Short Strangle :A Short Strangle is a slight modification to the ShortStraddle. It tries to improve the profitability of the trade for the Seller ofthe options by widening the breakeven points so that there is a muchgreater movement required in the underlying stock / index, for the Calland Put option to be worth exercising.

y Collar :A Collar is similar to Covered Call but involves another leg buying a Put to insure against the fall in the price of the stock. It is aCovered Call with a limited risk. So a Collar is buying a stock, insuringagainst the downside by buying a Put and then financing the Put byselling a Call.


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Investors are not much aware about the derivativesmarket as well as the future and options.

Value of an option depends upon the strike price,expiration date, value of underlying asset etc.

Value of an option comprises intrinsic value of optionand time value of option.

Option values have lower and upper boundaries.

It was also observed that many broking houses offering

internet trading allow clients to use their conventionalsystem as well just ensure that they do not loose themand this instead of offering-broking services theybecomes service providers


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Derivatives are extremely important and have a big impact on otherfinancial market and the economy. The project is designed to upgradeinvestors knowledge with the basics of how to make investmentdecisions in futures and options with reference to bear market. It isimportant for the investors that they must analyze the fundamental(Economic & Financial), technical and other factors for dealing infutures and options. For many investors options are useful as tools ofrisk management. Different Option Strategies and the options help toearn a risk-less profit. The option strategies are used according to thenature of market condition. If market is bullish - Long Call, Covered

Call is useful. In case of bearish market Long Call and Long Put optionstrategies is useful. In neutral option - Condor and Long Straddle isuseful tools for the investment


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y I recommend the exchange authorities to take steps to educate investorsabout their rights and duties. I suggest to the exchange authorities toincrease the investors confidences.

y I also recommend the exchange authorities to appoint a well educatedpersons, so that he can provide the basic information to the clientregarding the future and options.

y I recommend the exchange authorities to be vigilant to curb widefluctuations of prices.

y The speculative pressures are responsible for the wide changes in the price,not attracting the genuine investors to the greater extent towards themarket.

y Genuine investors are not at all interested in the speculative gain as their

investment is based on the future profits, therefore the authorities of theexchange should be more vigilant to curb the speculation.

y Necessary steps should be taken by the exchange to deal with thesituations arising due to break down in online trading.


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Books:

Guide To Indian Stock Market, By Jitendra Gala

Kothari C.R., Research Methodology, New Delhi, Vikas

Publishing House pvt.Ltd. 1978

Websites:

www.google.com

www.bseindia.comwww.nseindia.com

www.moneycontrol.com


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T

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Study on Option Strategy Fin Vikash Sinha