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Risk Management in
Equity Derivative Market
By
5/21/2009
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Risk Management in Equity Derivative Market
A REPORT
ON
Submitted By:
Ashish Dilipkumar Pugalia
Enrollment No: 08BS0002411
INDIA INFOLINE LIMITED
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Risk Management in Equity Derivative Market
ACKNOWLEDGEMENT
I take this opportunity to thank all those who have helped and inspired me during
the course of time of this project without which the successful completion of the
project would not have been possible.
Firstly, I take this opportunity to thank Prof. P. Bala Bhaskaran (Director, IBS
Ahmedabad), who has always stood by me and encouraged me to embark on the
path of learning.
Last but not the least I would like to thank my fellow management trainees from
IBS, Ahmedabad. By interacting with them, I was able to generate more
meaningful ideas that have enabled me to further complete this project
successfully.
Ashish Pugalia
08BS0002411
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Risk Management in Equity Derivative Market
TABLE OF CONTENT
Acknowledgment………………………………………………………………….3
Abstract……………………………………………………………………………6
Executive Summary………………………………………….……………………7
Introduction……………………………………………………………………….8
Company Profile………………………………………………………………...10
Derivatives…………………………………………………………………13
Participants in Derivative Market………………………………………….14
Forward Contract…………………..………….……………………………17
Future Contract……………………..………….…………………………...18
Options……………………………………………………………………..10
Options Strategies…………………………………..……………………………23
Buy Future……………………………………...…………………………..23
Sell Future……………………………………...…………………………..24
Buy Call. …………………………………….…..…………………………25
Buy Put…………………………………………..…………………………26
Sell Call…………………………………………….………………………28
Sell Put……………………………………………………………………..30
Bull Spread(Call) ……………………………………..……………………31
Bull spread (Put)……………………………………………………………33
Bear Spread (Call)………………………………………………………….34
Bear Spread (Put) ……………………………………….…………………35
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Risk Management in Equity Derivative Market
Findings.……………………………………………...…………………………..51
Conclusions ………………………………………………………………………52
Recommendations ……….………………………………………………………54
References ……………………………………………………………………….55
Annexure ………………………...………………………………………………56
Glossary …………………………...……………………………………………..70
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Risk Management in Equity Derivative Market
ABSTRACT
Derivative Market is high risk high return segment of an equity market. The past
decade has witnessed a massive growth in the use of financial derivatives by a
wide range of corporate and financial institutions. This growth has run in parallel
with the increasing direct reliance of companies on the capital market as the major
source of long term funding. In this respect, derivatives have a vital role to play in
enhancing shareholder value by ensuring access to the cheapest source of funds.
During this project I got to know different ways or different strategies by using
which investor can minimize the loss. An individual always faces the problem as to
which strategy investor should use in different market condition. During this
course of Internship I had gather a good knowledge of cash and derivative market.
This knowledge was helpful in my project to achieve the objective.
I had applied 10 strategies during trading hour on investor from this 10 strategies,
8 strategies was turned out in profit whereas remaining 2 strategies is in loss. By
using Black Schole model I had calculate the option prices from which the investor
or RM will get to know whether to buy the option or not. So that investor gets the
signal of risk while investing in the option market.
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Risk Management in Equity Derivative Market
EXECUTIVE SUMMARY
This is the report submitted by Ashish Dilipkumar Pugalia studying at Icfai
Business School; Ahmedabad, in the partial fulfillment of the requirement of MBA
Program, carried at India Infoline Ltd, Surat. India Infoline Limited is engaged in
providing financial services all across the country and is regarded as the BEST
broking houses in India.
Equity market reforms are a major constituent of the overall economic reforms in
India and considering the growing surge in the broking firm, the objective of the
project is such set so that it enables to capture the skills required for forming the
bases of the organization.
To achieve the objectives of the project, training was undergone in to gain practical
knowledge and learn about derivatives and its applications and also to know the
behaviors of investor during trading hours. The training enabled to learn the
concepts of the derivatives and the importance of various tools that were used to
undergo the activities to invest in equity market.
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Risk Management in Equity Derivative Market
INTRODUCTION
OBJECTIVE OF THE PROJECT:
To learn the basics of secondary market. It includes learning various
terminologies used for day-to-day trading.
To learn about derivatives and its application.
To identify, understand and analyze the strategy which helps to minimize the
Risk in the Indian Equity Derivative Market.
To implement strategies on investor portfolio and measures the profit and
loss after implementing the strategies.
LIMITATIONS OF STUDY:
Some of the major limitations of this study are as follows:
a) This study is limited to the Equity derivative market. We are not taking
commodity market, which can also be used as a risk marketing tool in
derivative market.
b) My study is to reduce/minimize the risk in derivative market but we can
just minimize or reduce the risk, and can’t make it to zero.
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Risk Management in Equity Derivative Market
c) Brokerage and other charges like security transaction tax and service tax
are not considered while investing which sometimes form a very
important part
METHODOLOGY:
Secondary Source
a) Websites
b) Books
c) Data from India Infoline
d) Articles
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Risk Management in Equity Derivative Market
COMPANY PROFILE
“Knowledge is power and power brings security. Risk is a very relative term and
changes with every individual and situation. Financial management is not just
about managing risk but also managing knowledge and finally deriving answers
that generate wealth, security and trust.”
VISION
PUNCH LINE
OBJECTIVE
To provide unbiased and independent information to market intermediaries and
investors.
BUSINESS DESCRIPTION
The India Infoline group, comprising the holding company, India Infoline Limited
and its wholly-owned subsidiaries, straddle the entire financial services space with
offerings ranging from Equity research, Equities and derivatives trading,
Commodities trading, Portfolio Management Services, Mutual Funds, Life
Insurance, Fixed deposits, Gold, bonds and other small savings instruments to loan
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Risk Management in Equity Derivative Market
products and Investment banking. India Infoline also owns and manages the
websites www.indiainfoline.com and www.5paisa.com .
The company has a network of 596 branches spread across 345 cities and
towns. It has more than 500,000 customers.
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Risk Management in Equity Derivative Market
The Indian Equity Market is also known as Indian share market or Indian stock
market. The Indian market of equities is transacted on the basis of two major stock
indices, National Stock Exchange of India Ltd. (NSE) and The Bombay Stock
Exchange (BSE).
Indian Equity Market at present is a lucrative field for the investors and investing
in Indian stocks are profitable for not only the long and medium-term investors,
but also the position traders, short-term swing traders and for intra-day traders. In
terms of market capitalization, there are over 2500 companies in the BSE chart list.
Generally the bigger companies are listed with the NSE and the BSE, but there is
the OTCEI or the Over the Counter Exchange of India, which lists the medium and
small sized companies. There is the SEBI or the Securities and Exchange Board of
India which supervises the functioning of the stock markets in India.
The growing financial capital markets of India being encouraged by domestic and
foreign investments is becoming a profitable business more with each day. If all
the economic parameters are unchanged Indian Equity Market will be conducive
for the growth of private equities and this will lead to an overall improvement in
the Indian economy.
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Risk Management in Equity Derivative Market
DERIVATES
In finance, "Derivatives are financial instruments whose price and value derive
from the value of assets underlying them". In other words, they are "financial
contracts whose values derive from the value of underlying stocks, bonds,
currencies, commodities, etc." Examples of the assets which can be referenced by a
derivatives contract are diverse and may be anything from bars of gold
(commodity derivatives), to stocks (equity derivatives), interest rates (interest rate
derivatives), currency exchange rates (currency derivatives), credit risk of third
party obligors (credit derivatives) and even the weather (weather derivatives)
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Risk Management in Equity Derivative Market
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Risk Management in Equity Derivative Market
price specifies in the contract. In this way, on party is the insurer (i.e. risk
taker) for one type of risk and the counterparty is the insurer (i.e. risk taker)
for another type of risk.
SPECULATORS: Speculators use futures and options contracts to get extra
leverage in betting on future movements in the price of an asset. They can
increase both the potential gains and potential losses by usage of derivatives
in a speculative venture. Speculators do not aim to minimize risk but rather
to benefit from the inherently risky nature of the futures market. They aims
to profit from the very price change. Hedgers want to minimize their risk no
matter what they’re investing in, while speculators want to increase their risk
and therefore maximize their profits.
ARBITRAGEURS: Arbitrageurs are in business to take advantage of a
discrepancy between prices in two different markets. If, for example, they
see the futures price of an asset getting out of line with the cash price, they
will take offsetting positions in the two markets to lock in a profit. The
simultaneous purchase and sale of an asset in order to profit from a
difference in the price. This usually takes place on different exchanges or
market places. Arbitrageurs are also known as a ―Riskless Profit‖. For
example: Say a domestic stock also trades on a foreign exchange in another
country, where it hasn’t adjusted for the constantly changing exchange rate.
A trader purchases the stock where it is undervalued and short sells the stock
where it is overvalued, thus profiting from the differences.
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Risk Management in Equity Derivative Market
Risk consists of two components, the systematic risk and unsystematic risk.
The systematic risk is caused by factors external to the particular company and
uncontrollable by the company. The systematic risk affects the market as a whole.
In the case of unsystematic risk the factors are specific, unique and related to the
particular industry or company.
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Risk Management in Equity Derivative Market
TYPE OF DERIVATIVES
FORWARD CONTRACT
One party agrees to sell, the other to buy, for a forward price agreed in advance. In
a forward transaction, no actual cash changes hands. The forward price of such a
contract is commonly contrasted with the spot price, which is the price at which the
asset changes hands (on the spot date, usually two business days). The difference
between the spot and the forward price is the forward premium or forward
discount.
For example, Jewelry manufacturer Goldbuyer agrees to buy gold at Rs. 600 (the
forward or delivery date) from gold mining concern Goldseller. No money changes
hands between Goldbuyer and Goldseller at the time the forward contract is
created. Rather, Goldbuyer’s payoff depends on the spot price at the time of
delivery. Suppose that the spot price reaches Rs. 610 at the delivery date. Then
Goldbuyer gains Rs. 10 on his forward position (i.e. the difference between the
spot and forward prices) by taking delivery of the gold at Rs. 600.
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Risk Management in Equity Derivative Market
FUTURE CONTRACT
A futures contract gives the holder the obligation to buy or sell, which differs from
an options contract, which gives the holder the right, but not the obligation. In
other words, the owner of an options contract may exercise the contract. Both
parties of a "futures contract" must fulfill the contract on the settlement date. The
seller delivers the commodity to the buyer, or, if it is a cash-settled future, then
cash is transferred from the futures trader who sustained a loss to the one who
made a profit. To exit the commitment prior to the settlement date, the holder of a
futures position has to offset his position by either selling a long position or buying
back a short position, effectively closing out the futures position and its contract
obligations.
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Risk Management in Equity Derivative Market
70.00%
35000000
Turnover in Lacs
60.00%
30000000
50.00%
25000000
40.00%
20000000 30.00%
20.00%
15000000
10.00%
10000000
0.00%
50000000
-10.00%
0 -20.00%
FY '06 FY '07 FY '08 FY '09
TURNOVER IN LACS 150415342.6 252213791 375083148.8 334703318.1
% GROWTH 0.00% 67.68% 48.72% -10.77%
Source: nseindia.com
Note: FY ’06 is taken as a base year to calculate the growth in the progressive FY
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Risk Management in Equity Derivative Market
OPTIONS
Options are financial instruments that convey the right, but not the obligation, to
engage in a future transaction on some underlying security. For example, buying a
call option provides the right to buy a specified amount of a security at a set strike
price at some time on or before expiration, while buying a put option provides the
right to sell. Upon the option holder's choice to exercise the option, the party that
sold, or wrote, the option must fulfill the terms of the contract.
For example, Jewelry manufacturer Goldbuyer agrees to buy gold at Rs. 600 (the
forward or delivery date) from gold mining concern Goldseller. Suppose that
Goldbuyer belives that there is some chance for the spot price to fall below Rs.600,
so that he losses on his forward position. To limit his loss, Goldbuyer could
purchase a call option for Rs. 5 (the option price or premium) at a strike or
exercise price of Rs. 600 with an expiration date three months from now. The call
option gives Goldbuyer the right (but not the obligation) to buy gold at the strike
price on the expiration date. Then, if the spot price indeed declines, he could
choose not to exercise the option, and his loss would be limited to the purchase
price of Rs. 5. Alternatively, Goldbuyer may anticipate that the spot price is very
likely to decline, and attempt to profit from such an eventuality by buying a put
option, giving him the right to sell gold at the strike price on the expiration date.
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Risk Management in Equity Derivative Market
OPTIONS
CALL PUT
OPTION OPTION
WORKING OF OPTIONS
2. If you buy an option, you are not obligated to buy or sell the underlying
instrument; you simply have the right to.
3. If you sell an option and the option is exercised, you are obligated to deliver the
underlying asset (call) or take delivery of the underlying asset (put) at the strike
price of the option regardless of the current price of the underlying asset.
4. Options are good for a specified period of time, after which they expire and you
lose your right to buy or sell the underlying instrument at the specified price.
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Risk Management in Equity Derivative Market
7. Options are available in several strike prices representing the price of the
underlying instrument.
8. The cost of an option is referred to as the option premium. The price reflects a
variety of factors including the current price of the underlying asset, the strike
price of the option, the time remaining until expiration, and volatility.
9. Options are not available on every stock. There are approximately 2,200 stocks
with tradable options. Each stock option represents 100 shares of a company's
stock.
40000000
Growth in Option Market 200.00%
180.00%
35000000
160.00%
30000000
140.00%
Turnover in Lacs
25000000
120.00%
20000000 100.00%
80.00%
15000000
60.00%
10000000
40.00%
50000000
20.00%
0 0.00%
FY '06 FY '07 FY '08 FY '09
Turnover in Lacs 33845850.03 79186585.37 136203241.5 372950866.4
% Growth 0.00% 133.96% 72.00% 173.82%
Source: nseindia.com
Note: FY ’06 is taken as a base year to calculate the growth in the progressive FY
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Risk Management in Equity Derivative Market
OPTIONS STRATEGIES
Future Market
There is direct relationship between the Cash and Future market of any scrip.
Direct relationship in this scenario doesn’t mean that there will be same changes in
price in both cash and future market. These relationships indicate that future value
of any scrip is derived from the cash market of that particular scrip. Investor before
investing in any future scrip look at the price change in the cash market so that
while investing in any of the future scrip investor is aware about the somewhat
changes in the cash market of that scrip.
BUY FUTURE
Graph shown below is the example of % change of Reliance future price with the
% change of the Reliance cash market. In this graph one get to know that from 6 th
April to 15th April, 2009 there is more or less same changes of the price changes is
taken place.
4
2
0
-2
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Risk Management in Equity Derivative Market
SELL FUTURE
Graph shown below is the changes in the price of future and cash market of the
INFOSYSTCH. In graph there is a decline in the price of future and cash market
from 6th April to 15th April, 2009 which indicates that if there is holding of the
INFOSYSTCH future scrip then an investor must sell the future scrip in between
the given date to reduce the loss in future.
-1
% change
-2
-3
-4
-5
-6
6-Apr-09 8-Apr-09 9-Apr-09 13-Apr-09 15-Apr-09
CASH -2.023211502 0.769097523 0.133088738 -1.233449477 -2.696864111
FUTURE -2.832773858 0.428170172 0.356237583 -1.061862026 -2.524491334
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BUY CALL
Strategy View
Investor thinks that the market will rise significantly in the short-term.
Strategy Implementation
Call options are bought with a strike price of a. The more bullish the investor is,
the higher the strike price should be.
Profit
Stock Price
Example Loss
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Risk Management in Equity Derivative Market
Net profit=
Payoff from
Stock price Total pay off payoff –
long call
premium
X >10-10 = X
S1 >130 S1-120 X >10
>0
S1=130 130 – 120 10 10 – 10 = 0
S1=<120 Not exercised 0 -10
BUY PUT
Strategy View
Investor thinks that the market will fall significantly in the short-term. .
Strategy Implementation
Put option is bought with a strike price of a. The more
bearish the investor is, the lower the strike price should be.
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Example
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Net profit=
Payoff from
Stock price Total pay off payoff -
long put
premium
S1>110 0 not exercise 0 -7.50
S1=102.50 -102.50+110 +7.50 -7.50+7.50 =0
X>7.50-7.50=
S1<102.50 -X <102.50+110 X >7.50
X>0
SELL CALL
Strategy View
Investor is certain that the market will not rise and is unsure/ unconcerned whether
it will fall.
Strategy Implementation
Call option is sold with a strike price of a. If the
investor is very certain of his view then at-the-
money options should be sold, if less certain, then
out-of-the-money ones should be sold.
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Risk Management in Equity Derivative Market
Example
Net profit=
Payoff from
Stock price Total pay off payoff +
short call
premium
S1 >130 130-S1 -X <0 -X-10 = -X <0
S1=130 130 – 120 10 10 – 10 = 0
S1<130 No exercise 0 10
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Risk Management in Equity Derivative Market
SELL PUT
Strategy View
Investor is certain that the market will not go down, but unsure/unconcerned about
whether it will rise.
Strategy Implementation
Put options are sold with a strike price a. If an
investor is very bullish, then in-the-money puts
would be sold.
Example
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Risk Management in Equity Derivative Market
Net profit=
Payoff from
Stock price Total pay off payoff +
short put
premium
S1>110 0 not exercise 0 7.50
S1=102.50 102.50-110 -7.50 -7.50+7.50 =0
S1<102.50 X <102.50-110 X <-7.50 X<-7.50+7.50=
X<0
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Risk Management in Equity Derivative Market
Strategy Implementation
Call option is bought with a strike price of a and
• •
another call option sold with a strike of b, E1 E2 Stock price
Profit/loss of
Long call
Profit/loss of
short call
Investor before investing in any of the call or put option looks at the future price of
that scrip then takes the decision to invest in any of the call or put option.
Here investor invests in Reliance Industry. Future price of Reliance on 9th of April
is Rs. 1701
Type of Option Strike Price Premium on 9th
April,2009
Buy Call 1650 Paid Rs.132
Sell Call 1800 Receives Rs.50
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Risk Management in Equity Derivative Market
Strategy Implementation
Put option is bought with a strike of a and another put sold with a strike of b,
producing a net initial credit.
option
April)
Paid Rs.
Put purchase 1650 • •
E1 E2 Stock price
57.85
Received Rs.
Put sold 1740
90
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Risk Management in Equity Derivative Market
Strategy View
Investor thinks that the market will not rise, but wants to cap the risk. Conservative
strategy for one who thinks that the market is more likely to fall than rise.
Strategy Implementation
Call option is sold with a strike price of a and another call option bought with a
strike of b
Investor before investing in any of the call or put option looks at the future price of
that scrip then takes the decision to invest in any of the call or put option.
Here investor invests in INFOSYSTCH. Future price of INFOSYSTCH on 6 th of
April is Rs. 1460.
Type of the Exercise price of Premium
Profit/ loss from Profit/ loss from
option the option on option short call Long call
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Risk Management in Equity Derivative Market
Strategy View
Investor thinks that the market will not rise, but wants to cap the risk. Conservative
strategy for one who thinks that the market is more likely to fall than rise.
Strategy Implementation
Put option is sold with a strike of a and
Profit/ loss from
another put bought with a strike of b. Profit/ loss from
60 70
• • Stock price
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Risk Management in Equity Derivative Market
Type of the
Strike Price Premium on option
option
Put purchase 1440 Paid Rs. 58.50
Put sold 1350 Received Rs. 30
BUY STRADDLE
Strategy View
Investor thinks that the market will be very volatile in the short-term.
profit
Strategy Implementation
Call option and put option are bought with
loss
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Risk Management in Equity Derivative Market
Here investor invests in Nifty. Future price of Nifty on 6 th of April is Rs. 3281.50.
SELL STRADDLE
Strategy View
Investor is certain that the market will not be very volatile (will neither go up nor
down very much).
Strategy Implementation
A call option and a put option are sold with
b• a• •c
Here investor invests in RNRL. Future price of RNRL on 6 th of April is Rs. 50.90.
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Risk Management in Equity Derivative Market
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Risk Management in Equity Derivative Market
BUY STRANGLE
Strategy View
Investor thinks that the market will be very volatile in the short-term [this is similar
to the buy straddle but the premium paid here is less]
• •
E1 E2 Stock price
loss
Here investor invests in DLF. Future price of RNRL on 6 th of April is Rs. 243.05
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Risk Management in Equity Derivative Market
SELL STRANGLE
Strategy View
The investor thinks that the market will not be volatile within a broadish band.
Strategy Implementation
Put option is sold with a strike price of a and a call option is sold with the higher
strike price b
c• •a •b •d
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Risk Management in Equity Derivative Market
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Risk Management in Equity Derivative Market
LONG BUTTERFLY
Strategy View
Investor thinks that the market will not be volatile, but wants to cap the downside
risk. .
Strategy Implementation
Call option with low strike b bought and 2 call options with medium strike a sold
and call option with high strike c bought.
•b •d a• •e •c
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Risk Management in Equity Derivative Market
Net Profit/Loss = Profit on buy call + Loss on sell of 2 call + Profit on buy call
= 90 + (-159.30) + 81.50
= 12.20 (Profit)
SHORT BUTTERFLY
Strategy View
Investor mildly thinks that the market will be volatile.
Strategy Implementation
Call option is sold with strike b, two call options are
profit
E1
bought with strike a and a call option is sold with strike c.
E3
a
•b • •c
E2
loss
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Risk Management in Equity Derivative Market
Net Profit/Loss = Profit on sell call + Loss on buy of 2 call + Profit on sell call
= 56.85 + (-82.60) + 45.30
= 19.55 (Profit)
Out of the 10 strategies, 8 strategies are turn out in profit for the investor and 2
strategies are in loss beard by the investor at India Infoline Limited.
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Risk Management in Equity Derivative Market
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Risk Management in Equity Derivative Market
The Black Shcoles Model is one of the most import concepts in modern financial
theory. It was developed in 1973 by Fisher Black, Robert Merton and Myron
Scholes and is still widely used today, and regarded as one of the best ways of
determining fair prices of options. The Black-Scholes option pricing formula prices
European put or call options on a stock that does not pay a dividend or make other
distribution. The formula assumes the underlying stock prices follow a constant
volatility.
The Black-Scholes formulas for the prices of European calls and puts on a non-
dividend paying stock are:
P= E e-rtN(-d2) – S0 N(-d1)
s t1/2
d2 = d1 – s t1/2
The Greeks – Delta, Gamma, Vega, Theta and Rho – for the CALL are:
Delta = N (d1)
Gamma = s N (d1)
S0 s t1/2
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Risk Management in Equity Derivative Market
2 t1/2
The Greeks – Delta, Gamma, Vega, Theta and Rho – for the PUT are:
Delta = N (d1) – 1
Gamma = s N (d1)
S0 s t1/2
2 t1/2
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Risk Management in Equity Derivative Market
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Risk Management in Equity Derivative Market
In this model I had generated different sheet and named them as per the condition
of the market. In each sheet, by using Black & Schole Model I had calculated
Option price, Delta, Gamma, Vega, Theta and Rho which will helpful for India
Infoline Ltd. These calculations are both for CALL and PUT option.
As per the model, the option prices calculated are the European option prices. This
calculated option prices are the theoretical option prices.
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Risk Management in Equity Derivative Market
If the theoretical (calculated) option prices are less than the current then by
using this one can invest in the option market.
For an Investor or RM, this model is very easy to understand because the names
of the sheet indicate the condition of the market.
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Risk Management in Equity Derivative Market
FINDINGS
Sentiments Sub-sentiments Strategy Diagrams
Bullish Very Bullish Buy Call
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Risk Management in Equity Derivative Market
CONCLUSIONS
The project provided me with an insight into deeper areas of the derivative market.
While doing the project I was exposed to various new terminologies and newer
methods of handling investments.
I want to conclude this project by dividing the option strategies into Bullish,
Bearish and Neutral & by analyzing which strategies give more profit as per the
market condition.
BULLISH STRATEGIES
A. Buy Call: This strategy is very easy to implement and give good amount of
return if price increase. Here maximum loss is only the premium paid.
B. Buy Futures: Futures has given large amount of profits as compared to
options strategies but at the same time risk associated with it also very high.
C. Bull Spread (Call): It provides limited profits and limited loss. If Index/
Scrip goes up then one can have profits and vice-versa. This strategy should
be use when expected volatility in the market is less.
D. Bull Spread (Put): It provides limited profit and limited loss. The
maximum gain can be net premium received in this strategy.
E. Sell Put: In this strategy maximum profit is premium received and loss is
unlimited. If a person expects bullish view then he may go with this strategy
but this strategy is quite risky.
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Risk Management in Equity Derivative Market
NEUTRAL STRATEGIES
F. Buy Straddle: This strategy should only be used when expected volatility is
very high and market outlook is not known. If scrip remains at the same
price then loss will be maximum
G. Buy Strangle: This strategy should be used in very volatile market.
H. Sell Strangle: This strategy should be used when volatility is very less.
I. Long Butterfly: In this strategy there is very minimum risk and limited
profit. This strategy should be used when proper strike prices are available
to make this strategy.
J. Short Butterfly: This strategy led to profit when volatility is very high in
the option market.
K. Sell Straddle: When investor want more returns at higher risk then he may
go with this strategy. IF suddenly the volatility increases at a very high rate
then huge losses may occur.
BEARISH STRATEGIES
L. Buy Put: This strategy should be used when investors perceive that the
option price will go down.
M. Sell Future: This strategy can be use to hedge or it can be use as a
speculative strategy when option market is expected to fall.
N. Bear Spread (Put) & Bear Spread (Call): This strategy involves very less
risk & bearish outlook. So for those investors who expect the option prices
will go down but they are not sure about it then they may use this strategy.
O. Sell Call: In this strategy maximum profit earned and maximum loss is
unlimited. So less risk takers should select very lower strike price while
selecting this strategy.
53
Risk Management in Equity Derivative Market
RECOMMENDATIONS
Many strategies like straddle, strip, strangle and butterfly. Depend upon
volatility of scrip or index and give returns accordingly. So volatility should
be forecasted before forming any strategy.
Fundamental and Technical analysis of the scrip or index should be doen
before formulating any strategy.
Specific strategy should be used according to the purpose of investor instead
of investing haphazardly in futures and options.
Derivative market is highly ill- famed among the investor. Thus it is required
to provide in depth knowledge of the market to investors.
Strategies should be evaluated daily for better returns and less risk.
Theoretical price of an option should be found out using option pricing
model (Black & Scholes) and those options whose price is less than
theoretical price should be used for formulation of strategy.
By using a hedging strategy an investor can recover some of his losses and
can also make profit.
When the movement and volatility of market or scrip is not known at that
time investor should use hedging strategies.
Investor should make strategy according to position cash market and
accordingly make strategy.
54
Risk Management in Equity Derivative Market
REFERENCES
Books
(a) Options, futures and Other Derivatives by JOHN C. HULL
(b) NCFM Derivative Market (dealers) Module
(c) ―Future and Option‖ second edition Tata McGraw- Hill by N D VOHRA,
B R Bagri
Websites
(a) www.nseindia.com
(b) www.moneysonteol.com
(c) www.bseindia.com
(d) www.indiainfoline.com
(e) www.investopedia.com
(f) http://www.cboe.com/Strategies/EquityOptions/BuyingCalls/Part1.aspx
(g) http://www.quickmba.com/finance/black-scholes/
(h) http://www.riskglossary.com/link/black_scholes_1973.htm
55
Risk Management in Equity Derivative Market
ANNEXURE
Instrument Symbol Date Expiry Open High Low Close
6-Apr- 30-Apr-
FUTSTK DLF 09 09 206.7 221.8 198.1 201.1
8-Apr- 30-Apr-
FUTSTK DLF 09 09 193 209.9 186 207.85
9-Apr- 30-Apr-
FUTSTK DLF 09 09 213 220.4 201.1 214.85
13-Apr- 30-Apr-
FUTSTK DLF 09 09 216 232.45 212.3 228.8
15-Apr- 30-Apr-
FUTSTK DLF 09 09 221 253.25 219 243.6
DLF Future (SOURCE: nseindia.com)
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK DLF PA 09 09 190 9 18 9 16.9
8-Apr- 30-Apr-
OPTSTK DLF PA 09 09 190 19 21.85 12.2 12.8
9-Apr- 30-Apr-
OPTSTK DLF PA 09 09 190 11.1 14 9 10.65
13-Apr- 30-Apr-
OPTSTK DLF PA 09 09 190 10.4 10.5 7.7 8.3
15-Apr- 30-Apr-
OPTSTK DLF PA 09 09 190 7.5 8 4.25 5.35
DLF PUT (STRIKE PRICE: 190) (SOURCE: nseindia.com)
56
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK DLF CA 09 09 220 17 20 13 15
8-Apr- 30-Apr-
OPTSTK DLF CA 09 09 220 5.3 18 5.3 16.95
9-Apr- 30-Apr-
OPTSTK DLF CA 09 09 220 20.8 21.9 13.5 18.25
13-Apr- 30-Apr-
OPTSTK DLF CA 09 09 220 18.1 29 17.05 26.75
15-Apr- 30-Apr-
OPTSTK DLF CA 09 09 220 21.7 45.35 21.7 40.8
DLF CALL (STRIKE PRICE: 220) (SOURCE: nseindia.com)
57
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK ICICIBANK CA 09 09 410 14 14.85 10.95 14.4
8-Apr- 30-Apr-
OPTSTK ICICIBANK CA 09 09 410 9 14.75 8 13.2
9-Apr- 30-Apr-
OPTSTK ICICIBANK CA 09 09 410 13.25 22 11 20.1
13-Apr- 30-Apr-
OPTSTK ICICIBANK CA 09 09 410 25.4 33.5 25.05 29.1
15-Apr- 30-Apr-
OPTSTK ICICIBANK CA 09 09 410 26.45 50 25 48
ICICIBANK CALL (STRIKE PRICE: 410) (SOURCE: nseindia.com)
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK ICICIBANK PA 09 09 360 21 24.3 17.5 20
8-Apr- 30-Apr-
OPTSTK ICICIBANK PA 09 09 360 25 28 15 16.65
9-Apr- 30-Apr-
OPTSTK ICICIBANK PA 09 09 360 15.75 20 9.95 11.1
13-Apr- 30-Apr-
OPTSTK ICICIBANK PA 09 09 360 6.25 8.25 6.25 7.55
15-Apr- 30-Apr-
OPTSTK ICICIBANK PA 09 09 360 8.1 9.7 3.5 4.4
ICICIBANK PUT (STRIKE PRICE: 360) (SOURCE: nseindia.com)
58
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK RNRL CA 09 09 55 3 4.25 2.4 3.9
8-Apr- 30-Apr-
OPTSTK RNRL CA 09 09 55 2.8 6.25 2.8 5.5
9-Apr- 30-Apr-
OPTSTK RNRL CA 09 09 55 5.9 7.25 5.25 5.8
13-Apr- 30-Apr-
OPTSTK RNRL CA 09 09 55 5.85 7.75 5.5 6.55
15-Apr- 30-Apr-
OPTSTK RNRL CA 09 09 55 6.05 9.9 6.05 9.5
RNRL CALL (STRIKE PRICE: 55) (SOURCE: nseindia.com)
59
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK RNRL PA 09 09 55 5.7 5.7 5.7 5.7
8-Apr- 30-Apr-
OPTSTK RNRL PA 09 09 55 5.25 6.05 4.8 5.25
9-Apr- 30-Apr-
OPTSTK RNRL PA 09 09 55 4.5 5.25 4 4.5
13-Apr- 30-Apr-
OPTSTK RNRL PA 09 09 55 3.4 4 2.95 3.55
15-Apr- 30-Apr-
OPTSTK RNRL PA 09 09 55 3.8 3.8 2.1 2.25
RNRL PUT (STRIKE PRICE: 55) (SOURCE: nseindia.com)
60
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTIDX NIFTY CE 09 09 3300 104.3 119.7 80.5 93.75
8-Apr- 30-Apr-
OPTIDX NIFTY CE 09 09 3300 60 154.25 52 145.8
9-Apr- 30-Apr-
OPTIDX NIFTY CE 09 09 3300 165 178 115.1 140.8
13-Apr- 30-Apr-
OPTIDX NIFTY CE 09 09 3300 155.1 193.15 127.5 161.1
15-Apr- 30-Apr-
OPTIDX NIFTY CE 09 09 3300 139.4 248.75 118.1 238.2
NIFTY CALL (STRKE PRICE: 3300) (SOURCE: nseindia.com)
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTIDX NIFTY PE 09 09 3300 125.5 153.1 112.55 134.6
8-Apr- 30-Apr-
OPTIDX NIFTY PE 09 09 3300 189 195 85 92.15
9-Apr- 30-Apr-
OPTIDX NIFTY PE 09 09 3300 79.8 109.6 71 87.1
13-Apr- 30-Apr-
OPTIDX NIFTY PE 09 09 3300 71 94.5 61.3 73.6
15-Apr- 30-Apr-
OPTIDX NIFTY PE 09 09 3300 90 95.8 41.25 44.5
NIFTY PUT (STRKE PRICE: 3300) (SOURCE: nseindia.com)
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Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1380 100 100 67.25 85.7
8-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1380 56.1 96 53.1 89.15
9-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1380 75 99.7 75 92.6
13-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1380 116 116 67.25 82
15-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1380 35 47.95 25.65 43.15
INFOSYSTCH CALL (STRIKE PRICE: 1380) (SOURCE: nseindia.com)
62
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1410 71.15 82 52 67.7
8-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1410 51.6 79 40.1 72.1
9-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1410 63.2 77.05 57 70.95
13-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1410 70 75 50.25 64.25
15-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1410 33.1 33.1 16.15 29.85
INFOSYSTCH CALL (STRIKE PRICE: 1410) (SOURCE: nseindia.com)
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1440 65 70 40 53.35
8-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1440 35 59.5 31.5 56.75
9-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1440 50 64 41.3 54.3
13-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1440 70 70 40 49.75
15-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1440 20 23.9 12.5 19.7
INFOSYSTCH CALL (STRIKE PRICE: 1440) (SOURCE: nseindia.com)
63
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1470 41.35 55 28.55 39.35
8-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1470 24.5 46.25 24.5 43.4
9-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1470 35.3 45 34 41.9
13-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1470 47 50 25.25 38.3
15-Apr- 30-Apr-
OPTSTK INFOSYSTCH CA 09 09 1470 13.05 16 7.3 13.25
INFOSYSTCH CALL (STRIKE PRICE: 1470) (SOURCE: nseindia.com)
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK INFOSYSTCH PA 09 09 1350 30 43.7 26 35.35
8-Apr- 30-Apr-
OPTSTK INFOSYSTCH PA 09 09 1350 42.1 60 31.1 33.8
9-Apr- 30-Apr-
OPTSTK INFOSYSTCH PA 09 09 1350 32 40.5 25 27.5
13-Apr- 30-Apr-
OPTSTK INFOSYSTCH PA 09 09 1350 30 46 30 36.55
15-Apr- 30-Apr-
OPTSTK INFOSYSTCH PA 09 09 1350 71 72.1 28.2 31.85
INFOSYSTCH PUT (STRIKE PRICE: 1350) (SOURCE: nseindia.com)
64
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK INFOSYSTCH PA 09 09 1440 58.5 80 58.5 72.1
8-Apr- 30-Apr-
OPTSTK INFOSYSTCH PA 09 09 1440 90.15 102 67.8 68.15
9-Apr- 30-Apr-
OPTSTK INFOSYSTCH PA 09 09 1440 65.8 68.5 61 65.7
13-Apr- 30-Apr-
OPTSTK INFOSYSTCH PA 09 09 1440 81 89 69.9 79.95
15-Apr- 30-Apr-
OPTSTK INFOSYSTCH PA 09 09 1440 140 140 90 90
INFOSYSTCH PUT (STRIKE PRICE: 1440) (SOURCE: nseindia.com)
65
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1650 134.95 134.95 76 94.65
8-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1650 60 136 59.5 129.75
9-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1650 132 160 123.9 131.2
13-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1650 126.25 172 126.25 161.9
15-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1650 170.5 219.9 164 208.4
RELIANCE CALL (STRIKE PRICE: 1650) (SOURCE: nseindia.com)
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1680 85 106 64 78.1
8-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1680 50 115 46.15 108.15
9-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1680 115 135 99 116.3
13-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1680 110 150 106.95 139
15-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1680 115 180 115 175
RELIANCE CALL (STRIKE PRICE: 1680) (SOURCE: nseindia.com)
66
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1710 76 89 55.1 65.05
8-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1710 42 97 36.45 90.35
9-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1710 105 115 78.25 94
13-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1710 118 128 86 112.85
15-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1710 99 160 90 155.65
RELIANCE CALL (STRIKE PRICE: 1710) (SOURCE: nseindia.com)
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1740 53 73 45 52.4
8-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1740 32 79.9 26 75.1
9-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1740 85 95 63 78.5
13-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1740 90 106 70 96.55
15-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1740 83 140 74.15 134.5
RELIANCE CALL (STRIKE PRICE: 1740) (SOURCE: nseindia.com)
67
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
9-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1800 50 66.9 40.05 52
13-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1800 52.45 73.95 45 65.15
15-Apr- 30-Apr-
OPTSTK RELIANCE CA 09 09 1800 45 99.95 45 94.35
RELIANCE CALL (STRIKE PRICE: 1800) (SOURCE: nseindia.com)
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK RELIANCE PA 09 09 1650 57.85 77.5 53 68.75
8-Apr- 30-Apr-
OPTSTK RELIANCE PA 09 09 1650 80 95.9 45 48.7
9-Apr- 30-Apr-
OPTSTK RELIANCE PA 09 09 1650 40 56.95 36.05 42.5
13-Apr- 30-Apr-
OPTSTK RELIANCE PA 09 09 1650 38 48.7 30.3 33.5
15-Apr- 30-Apr-
OPTSTK RELIANCE PA 09 09 1650 38 42 21 23.75
RELIANCE PUT (STRIKE PRICE: 1650) (SOURCE: nseindia.com)
68
Risk Management in Equity Derivative Market
Strike
Instrument Symbol Option Date Expiry Price Open High Low Close
6-Apr- 30-Apr-
OPTSTK RELIANCE PA 09 09 1740 90 128 90 113.7
8-Apr- 30-Apr-
OPTSTK RELIANCE PA 09 09 1740 115.2 115.2 77 83.15
9-Apr- 30-Apr-
OPTSTK RELIANCE PA 09 09 1740 75 92 61.15 77.4
13-Apr- 30-Apr-
OPTSTK RELIANCE PA 09 09 1740 70 84.2 53 60.4
15-Apr- 30-Apr-
OPTSTK RELIANCE PA 09 09 1740 74 74 39 41.45
RELIANCE PUT (STRIKE PRICE: 1740) (SOURCE: nseindia.com)
69
Risk Management in Equity Derivative Market
GLOSSARY
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.
Option Price/ Premium: Option price is the price which the option buyer pays to
the option seller. It is also referred to as the option premium.
Expiration Date: The date specified in the options contract is known as the
expiration date, the exercise date, the strike date or the maturity.
Strike Price: The price specified in the options contract is known as the strike price
or the exercise price.
Delta: Delta is the rate of change of option price with respect to the price of the
underlying asset. For example, the delta of a stock is 1. It is the slope of the curve
that relates the option price to the price of the underlying asset. Suppose the Delta
of a call option on a stock is 0.5. This means that when the stock price changes by
one, the option price changes by about 0.5, or 50% of the change in the stock price.
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Risk Management in Equity Derivative Market
Gamma: Gamma is the rate of change of the option’s Delta with respect to the
price of the underlying asset. In other words, it is the second derivative of the
option price with respect to price of the underlying asset.
Theta: Theta of the portfolio of options is the rate of change of the value of the
portfolio with respect to the passage of time with all else remaining the same.
Theta is also referred to as the time decay with all else remaining the same.
Vega: The Vega of the portfolio of derivatives is the rate of change in the value of
the portfolio with respect to the volatility of the underlying asset. If Vega is high in
the absolute terms, the portfolio’s value is very sensitive to small changes in
volatility. If Vega is low in absolute terms, volatility changes have relatively little
impact on the value of the portfolio.
Rho: The Rho of a portfolio of option is the rate of change of the value of the
portfolio with respect to the interest rate. It measures the sensitivity of the value to
interest rates.
71