PROJECT REPORT ON

E-Broking And Derivative Trading

AT KARVY STOCK BROKING LIMITED
Submitted by

Roll No.

A report submitted in the partial fulfillment of the Requirement of PGDM Program of XAVIER VIGNANA JYOTHI INSTITUTE OF MANAGEMENT

Project Guide: Faculty Guide:

CONTENTS
INTRODUCTION
Objective of study Methodology Data collection Scope

COMPANY PROFILE E-BROKING

Procedure for Opening an account Procedure for Funds Procedure for Stocks Details of e-broking

DERIVATIVES TRADING
Introduction to derivatives Types of derivatives Forward contracts Future contracts Margins TRADING STRATEGIES FOR FUTURES Hedging, Speculation and arbitrage Options Call Put TRADING STRATEGIES FOR OPTIONS Call option strategies Put option strategies Combinations

ANALYSIS
Bharati Airtel Infosys Mahindra & Mahindra

FINDINGS CONCLUSION ANNEXURE BIBLIOGRAPHY

OBJECTIVES OF THE STUDY To understand the derivative markets in Indian context To study the e-broking mechanism at Karvy To understand the importance To get an in-depth knowledge of the trading strategies involved in derivatives To study the effects of applying the derivatives strategies METHODOLOGY The following was the methodology adopted for the projected for the project: Derivatives market and its instruments were understood Stock broking services provided by Karvy was studied E-broking was observed and understood in the office Derivative strategies were applied in order to know there effect DATA COLLECTION Both primary and secondary data has been collected for the project Primary Data: This data was collected through direct interaction with the personnel in the company. Secondary Data: This data was collected from books, journals and websites SCOPE OF STUDY

The scope is limited to Karvy stock broking limited in Hyderabad. This study compromises of only derivative trading and e-broking

Company Overview
Karvy, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments. It serves over 16 million individual investors in various capacities and provides investor services to over 300 corporates. It has a wide network of 575 offices and 7300 professionals operating from 387 towns/cities and it has also established presence in UAE and USA. Over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. KARVY covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations and research of various industrial segments.

Quality Policy
To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Karvy will strive to exceed Customer's expectations Karvy is a member of National Stock Exchange (NSE) The Bombay Stock Exchange (BSE) The Hyderabad Stock Exchange (HSE).

Karvy Group Of Companies Karvy Consultants Limited Karvy Stock Broking Limited Karvy Investors Service Limited Karvy Computer Share Limited Karvy Comtrade Limited Karvy Insurance Broking Private Limited

Karvy Stock Broking Limited

Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freely towards attaining diverse goals of the customer through varied services. It creates a plethora of opportunities for the customer by opening up investment vistas backed by research-based advisory services. Helping the customer create waves in his portfolio and empowering the investor completely is the ultimate goal. Stock Broking Service Karvy offers services that are beyond just a medium for buying and selling stocks and shares. They provide services, which are multi dimensional and multi-focused in their scope. They offer trading on a vast platform; National Stock Exchange, Bombay Stock Exchange and Hyderabad Stock Exchange. They make trading safe to the maximum possible extent, by accounting for several risk factors and planning accordingly. In-depth research, constant feedback and sound advisory facilities are an ongoing process at Karvy. Karvy consists of highly skilled research team, comprising of technical analysts as well as fundamental specialists. They secure result-oriented information on market trends, market analysis and market predictions. This crucial information is given as a constant feedback to the customers, through daily reports delivered thrice daily.

Karvy also offers special portfolio analysis packages that provide daily technical advice on scrips for successful portfolio management and provide customized advisory services to help you make the right financial moves that are specifically suited to your portfolio. Karvy Stock Broking services are widely networked across India, with several trading terminals providing retail stock broking facilities. These services have increasingly offered customer oriented convenience, which are provided to a spectrum of investors, high-networth or otherwise with equal dedication and competence. To empower the investor further, companys research calls are disseminated systematically to all their stock broking clients through various delivery channels like email, chat, SMS, phone calls etc. Karvys foray into commodities broking has been path breaking and they are in the process of converting existing traders in commodities into the more organized mainstream of trading in commodity futures, both as a trading and risk hedging mechanism. Depository Participants The onset of the technology revolution in financial services Industry saw the emergence of Karvy as an electronic custodian registered with National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CSDL) in 1998. Karvy set standards enabling further comfort to the investor by promoting paperless trading across the country and emerged as the top 3 Depository Participants in the country in terms of customer serviced. The wide trading platform with a dual membership at both NSDL and CDSL offers a powerful medium for trading and settlement of dematerialized shares. The company has established live DPMs, Internet access to accounts and an easier transaction process in order to offer more convenience to individual and corporate investors. A team of professional and the latest technological expertise allocated exclusively to the demat division including technological enhancements like SPEED-e make response time quick and delivery impeccable. A wide national network makes their

efficiencies

accessible

to

all.

Distribution of Financial Products A 1600 team of highly qualified and dedicated professionals drawn from the best of academic and professional backgrounds are committed to maintaining high levels of client service delivery. This has propelled Karvy to a position among the top distributors for equity and debt issues with an estimated market share of 15% in terms of applications mobilized, besides being established as the leading procurer in all public issues. To tap the immense growth potential in the capital markets, Karvy enhanced the scope of their retail brand, Karvy the Finapolis, thereby providing planning and advisory services to the mass affluent. Here the customer needs and lifestyle in the context of present earnings is understood so as to provide adequate advisory services. Judicious planning that is customized to meet the future needs of the customer, deliver a service that is exemplary. The market-savvy and the ignorant investors, both find this service very satisfactory. The investment planning for each customer is done with an unbiased attitude so that the service is truly customized. Private Client Group This specialized division was set up to cater to the high net worth individuals and institutional clients keeping in mind that they require a different kind of financial planning and management that will augment not just existing finances but their life-style as well. It offers a comprehensive and personalized service that encompasses planning and protection of finances, planning of business needs and retirement needs and a host of other services, all provided on a one-to-one basis. The delivery and support modules have been fine tuned by giving the clients access to online portfolio information, constant updates on their portfolios as well as value-added advise on portfolio churning, sector

switches etc. The investment recommendations given by Karvy research team in the cash market have enjoyed a high success rate. Advisory Services Karvy has a dedicated team who continually engage in designing the right investment portfolio for each customer according to individual needs and budget considerations with a comprehensive support system that focuses on trading customers' portfolios and providing valuable inputs, monitoring and managing the portfolio through varied technological initiatives. This is made possible by the expertise the company has gained in the business over the years. Another venture towards being investor-friendly is the circulation of a monthly magazine called Karvy - the Finapolis', covering the latest of market news, trends, investment schemes and research-based opinions from experts in various financial fields. ACHIEVEMENTS OF KARVY Among the top 5 stock brokers in India (4% of NSE volumes) India's No. 1 Registrar & Securities Transfer Agents Among the to top 3 Depository Participants Largest Network of Branches & Business Associates ISO 9002 certified operations by DNV Among top 10 Investment bankers Largest Distributor of Financial Products Adjudged as one of the top 50 IT users in India by MIS Asia

True to Karvys spirit, this success is not their final destination, but just a platform to launch further enhanced quality services and thereby ensure complete customer satisfaction.

E-BROKING
Karvy Stock Broking Limited offers a fully integrated online share trading service, which ensures hassle free trading. The service offers trading on the following segments: NSE Cash Segment BSE Cash Segment NSE Derivatives In order to avail the broking services of Karvy, a client needs to register with KSBL and complete the formalities of filling in the registration forms and requisite agreements. Procedure for Opening an account 1. The client is required to submit the application form to CRD with all the required documents. Client code is generated and information is sent to E-Broking Team. 2. It takes 2 days for the old client to migrate to E-Broking system after the client code generation. For the new client it takes 1 day after the client code generation. 3. Welcome letter is sent to the client and a copy of it is sent to the Branch, on getting a reply from the client, password is provided to them.

Procedure for Funds Funds Pay-in Karvy has online payment gateway of HDFC bank, IDBI bank and UTI Bank. If the client has the bank account in these banks then he can directly transfer the funds to his trading account instantly and start trading. Funds Pay-out

Client can place funds withdrawal request from the free balance in his trading account on the trading system. If the client has the bank accounts in any centralized bank like HDFC Bank, IDBI, ICICI, CITY Bank, UTI Bank etc., then Karvy will directly deposit the cheques to their bank accounts. Other wise they courier the cheques to them. Procedure for Stocks Stocks Pay-in If the client has Demat account with Karvy Hyderabad DP or Karvy Bangalore DP, then Pay-in of the stocks is automated and client doesnt need to give the DIS. Client can also transfer his shares to Karvy Margin account, so that the shares will be updated online and made available to sell. Stocks Pay-out Stocks will be transferred to the demat account on the client request. Client can give standing instruction for auto pay-out, then Karvy will transfer the shares to clients demat account on T+2 basis. GETTING STARTED Home Page The Home page is displayed as soon as the client logs in and can also be displayed by clicking on the Home option at the top right-hand corner.

User Profile Under the Home page the client can view the personal and trading details that have been submitted to the Broker.

Market Watch Market Watch helps client understand what is happening in the market or industry. Client may like to track the price of the shares in a particular sector to get an overview of how the sector is performing or may wish to watch the share prices of competitor companies to those he has invested in.

After market hours or on exchange holidays the price information displayed will be the last trading day's price. Watch Lists A client may want to create up Watch Lists to monitor his potential investment opportunities at a glance. A maximum of 30 stocks / derivative contracts can be added to each Watch List and a maximum of 10 Custom Watch Lists can be created.

Price Alerts Price alerts helps client to keep track of his favorite stocks. The client can set alerts against price targets and Karvy will notify them the moment they happen. ORDERS AND TRADING Order Entry The order entry interface has been designed to enhance the execution process by providing the client with easy and efficient method to purchase / sell his stock.

This interface is common for both the Equity and the Derivative market and is available along with the market information.

Trading There are a few restrictions in some securities in the E-Broking terminal. Client cant place the orders in the following securities. a. T, TS, Z group shares in BSE b. BE series shares in NSE c. Penny stocks worth below Rs.10 If the client wants to trade in these shares, he needs to contact the customer support.

EXERCISE AND ASSIGNMENT Exercise and assignment depends on the nature and style of contracts .For instance American option can be exercised anytime during the lifetime of the contract, while an European option only on the expiry date of the contract. CASH STATEMENT A trading cash account is a plain vanilla account where client deposits cash to purchase stocks, derivatives, mutual funds etc. This is a regular account that each investor maintains with a broker to enable payment for purchases done. A cash statement shows the balances in clients cash account. It enables him to know his settlement credits and debits.

MARGINS AND TRADING LIMITS Margin Statement The margin statement reflects the clients purchasing power. It displays the margin sources and usage and the margin available for trading. Margins & Exposures: Clients are segmented into 3 groups i.e. A, B and C A group: Client is given intraday exposure of 8 times and delivery exposure of 1 time for equities. 60% margin on Stocks in the collateral is given. B group: Client is given intraday exposure of 6 times and delivery exposure of 1 time for equities. Margin is not given on Stocks in the collateral. C group: Client is given intraday exposure of 3 times and delivery exposure of 1 time for equities. Margin is not given on Stocks in the collateral. For FAO Carry-forward position client needs to pay SPAN Margin + Gross Exposure Margin. For Intraday Position Span Margin/2 + Gross Exposure Margin is charged

RECEIVABLES AND PAYABLES Receivables Receivables are shown according to the date on which they were traded. Payables Payables are cash obligations that are owed by client for all unsettled transactions.

THE PAYIN AND PAYOUT STATEMENT The Payin and Payout statement enables the client to know his obligations for his trading deals which are under settlement. His obligations for all unsettled trades are netted at the cash as well as stock level for each exchange. This information is very useful as it helps him to plan and meet his obligations in time for settlement. The Payin and Payout settlement that have happened for the latest closed settlement is also shown. The net obligation for the current trading day's activity will be shown at the end of the trading date. STOCKS The clients stocks are maintained in two types of accounts- Demat and Collateral. The Demat account is his depository account for which he has signed a 'Power of Attorney' agreement with his broker.The Collateral account is the account of his stocks that are maintained in the Brokers pool. In addition, the Broker permits him to sell stocks that he has bought but which are still under settlement. These include stocks bought on previous days and on the current day. These are termed Stock Receivables.

RISK MANAGEMENT Trade Positions Long Positions - When the buy trade quantity is more than the sell trade quantity the trader is said to have a long position.

Short Positions - When the sell trade quantity is more than the buy trade quantity then he is said to have a short position.

Closed Positions - When the buy quantity and sell quantity are equal, then the trader has booked a profit / loss based on the buy value and sell value and the position is said to be closed since he has realized his profit/loss.

Short positions profit when the market moves down on the stock while long positions profit when the market has an uptrend. Positions are maintained depending on the trading strategy that is adopted while placing the order: Delivery Positions - When clients intentions are to take delivery of the stock he buys or sells then he places the order in the delivery segment. The trades under this segment are tracked separately. Investors normally have delivery positions if their intention is to make long term profits by holding on to the stock for a duration of time. Intra-day Positions - When client wishes to only book profit and loss within a single trade then he adopts an intra-day trading strategy. In the intra-day segment the traders positions are valid only until the close of the current trading day. He is expected to close his positions by the end of the day, failing which his positions will be automatically closed by his broker. The intention is to book profit and loss based on intra-day price fluctuations in the market. He can create intra-day positions in the equity market and under derivatives in the futures market. Carry Forward Positions - In a derivative market one cannot close his positions by the end of the day. Since derivatives markets work on the basis of projected price as at a future date (expiry date), these positions have to be maintained for a longer duration. Carry forward positions are maintained for both options and future contracts and each position is valid until the expiry date listed in your contract.

The details of the services and the user-friendly software given above make it evident that Karvy Stock Broking Limited aims at providing hassle free trading to its clients. A team of professional and the latest technological expertise allocated exclusively to the EBroking division have made response time quick and delivery impeccable. With several trading terminals across the country Karvy has ensured customer convenience and thus has occupied a place among the top five stockbrokers in India.

DERIVATIVES TRADING

DERIVATIVES TRADING IN INDIA The plan to introduce derivatives in India was initially mooted by the National Stock Exchange (NSE) in 1995. The main purpose of this plan was to encourage greater participation of foreign institutional investors (FIIs) in the Indian stock exchanges. Derivatives were considered risky for retail investors because of their poor knowledge about their operation. In spite of the opposition, the path for derivatives trading was cleared with the introduction of Securities Laws (Amendment) Bill in Parliament in 1998. The introduction of derivatives was delayed for some more time as the infrastructure for it had to be set up. Derivatives trading required a computer-based trading system, a depository and a clearing house facility. In addition, problems such as low market capitalization of the Indian stock markets, the small number of institutional players and the absence of a regulatory framework caused further delays. Derivatives trading eventually started in June 2000. The introduction of derivatives was well received by stock market players. Trading in derivatives gained substantial popularity, and soon the turnover of the NSE and BSE derivatives markets exceeded the turnover of the NSE and BSE cash markets

DERIVATIVES Derivatives have become very important in the field of finance. They are very important financial instruments for risk management as they allow risks to be separated and traded. The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, livestock or anything else. In other words, Derivative

means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities With Securities Laws (Second Amendment) Act, 1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as: A Derivative includes: a. A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; b. A contract, which derives its value from the prices, or index of prices, of underlying securities; TYPES OF DERIVATIVES The following are the types of derivatives: (i) Over the counter derivatives (OTC) These are between two parties and are designed to suit the requirements of the parties concerned. In India OTC is not traded. E.g. Forwards and Swaps (ii) Exchange trade derivatives These are standardized contracts where the exchange sets the standard for trading by providing the contract specifications and the clearing corporation provides the trade guarantee and settlement activities. E.g. Future and Option

FORWARD CONTRACT A forward contract is the simplest mode of a derivative transaction. It is an agreement to buy or sell an asset of a specified quantity at a certain future time for a certain price. No cash is exchanged when the contract is entered into. Illustration Ram is an importer who has to make a payment for his consignment in six months time. In order to meet his payment obligation he has to buy dollars six months from today. However, he is not sure what the Re/$ rate will be then. In order to be sure of his expenditure he will enter into a contract with a bank to buy dollars six months from now at a decided rate. As he is entering into a contract on a future date it is a forward contract and the underlying security is the foreign currency. FUTURES A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. The settlement price, normally, converges towards the futures price on the delivery date. A futures contract gives the holder the obligation to buy or sell. 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.

Index futures Futures contract based on an index i.e. the underlying asset is the index, are known as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index. In India we have index futures contracts based on S&P CNX Nifty and the BSE Sensex and near 3 months duration contracts are available at all times. Each contract expires on the last Thursday of the expiry month and simultaneously a new contract is introduced for trading after expiry of a contract. Example: Futures contracts in Nifty in July 2001 Contract month July 2001 August 2001 September 2001 On July 27 Contract month August 2001 September 2001 October 2001 Expiry/Settlement August 30 September 27 October 25 Expiry/Settlement July 26 August 30 September 27

The permitted lot size is 200 or multiples thereof for the Nifty. That is if one Nifty contract is bought the total deal value will be 200*1100 (Nifty value)= Rs 2,20,000. In the case of BSE Sensex the market lot is 50. That is if one Sensex futures is bought the total value will be 50*4000 (Sensex value) = Rs 2,00,000.

MARGINS

The margining system is based on the JR Verma Committee recommendations. The actual margining happens on a daily basis while online position monitoring is done on an intra-day basis. Daily margining is of two types: 1. Initial margins 2. Mark-to-market profit/loss The computation of initial margin on the futures market is done using the concept of Value-at-Risk (VaR). The initial margin amount is large enough to cover a one-day loss that can be encountered on 99% of the days. VaR methodology seeks to measure the amount of value that a portfolio may stand to lose within a certain horizon time period (one day for the clearing corporation) due to potential changes in the underlying asset market price. Initial margin amount computed using VaR is collected up-front. The daily settlement process called "mark-to-market" provides for collection of losses that have already occurred (historic losses) whereas initial margin seeks to safeguard against potential losses on outstanding positions. The mark-to-market settlement is done in cash. Margin Collection Initial Margin - is adjusted from the available Liquid Networth of the Clearing Member on an online real time basis. Marked to Market Margins-The open positions (gross against clients and net of proprietary / self trading) in the futures contracts for each member are marked to market to the daily settlement price of the Futures contracts at the end of each trading day. The daily settlement price at the end of each day is the weighted average price of the last half an hour of the futures contract. The profits / losses arising from the difference between the trading price and the settlement price are collected / given to all the clearing members.

TRADING STRATEGIES FOR FUTURES

SPECULATION Speculators are those who do not have any position on which they enter in futures and options market. They only have a particular view on the market, stock, commodity etc. In short, speculators put their money at risk in the hope of profiting from an anticipated price change. They consider various factors such as demand supply, market positions, open interests, economic fundamentals and other data to take their positions Taking a view of the market If the investor feels that the market would go down on a particular day and fears that his portfolio value would erode, then There are two options available Option 1: Sell liquid stocks such as Reliance Option 2: Sell the entire index portfolio The problem in both the above cases is that it would be very cumbersome and costly to sell all the stocks in the index. And in the process one could be vulnerable to company specific risk. Therefore, the best thing to do is to sell index futures. Illustration: Scenario 1: On July 13, 2001, X feels that the market will rise so he buys 200 Nifties with an expiry date of July 26 at an index price of 1442 costing Rs 2,88,400 (200*1442). On July 21 the Nifty futures have risen to 1520 so he squares off his position at 1520.X makes a profit of Rs 15,600 (200*78)

Scenario 2: On July 20, 2001, X feels that the market will fall so he sells 200 Nifties with an expiry date of July 26 at an index price of 1523 costing Rs 3,04,600 (200*1523). On July 21 the Nifty futures falls to 1456 so he squares off his position at 1456. X makes a profit of Rs 13,400 (200*67). HEDGING Stock index futures contracts offer investors, portfolio managers, mutual funds etc several ways to control risk. A common measure of a stock market risk is the stocks Beta. Beta measures the relationship between movements of the index to the movement of the stock. The beta measures the percentage impact on the stock prices for 1% change in the index. Hedging involves protecting an existing asset position from future adverse price movements. In order to hedge a position, a market player needs to take an equal and opposite position in the futures market to the one held in the cash market. Every portfolio has a hidden exposure to the index, which is denoted by the beta. Assuming one has a portfolio of Rs 1 million, which has a beta of 1.2, he can factor a complete hedge by selling Rs 1.2 mn of S&P CNX Nifty futures. While hedging the cash position one needs to determine the number of futures contracts to be entered to reduce the risk to the minimum. Everyone has to remember that every buy position on a stock is simultaneously a buy position on Nifty. The following example shows how one can hedge positions using index futures: X holds HLL worth Rs 9 lakh at Rs 290 per share on July 01, 2006. Assuming that the beta of HLL is 1.13. How much Nifty futures does X have to sell if the index futures is ruling at 1527?

To hedge he needs to sell 9 lakh * 1.13 = Rs 1017000 lakh on the index futures i.e. 666 (1017000/1527) Nifty futures. On July 19, 2006, the Nifty future is at 1437 and HLL is at 275. X closes both positions earning Rs 13,389, i.e. his position on HLL drops by Rs 46,551 and his short position on Nifty gains Rs 59,940 (666*90). Therefore, the net gain is 59940-46551 = Rs 13,389. ARBITRAGE An arbitrageur is basically risk averse. He enters into those contracts were he can earn riskless profits. When markets are imperfect, buying in one market and simultaneously selling in other market gives risk less profit. Arbitrageurs are always in the look out for such imperfections. In the futures market one can take advantages of arbitrage opportunities by buying from lower priced market and selling at the higher priced market. In index futures arbitrage is possible between the spot market and the futures market (NSE has provided special software for buying all 50 Nifty stocks in the spot market. Example: If Wipro is quoted at Rs 1000 per share and the 3 months futures of Wipro is Rs 1070 then one can purchase Wipro at Rs 1000 in spot by borrowing @ 12% annum for 3 months and sell Wipro futures for 3 months at Rs 1070. Sale = 1070

Cost= 1000+30 = 1030 Arbitrage profit = 40

OPTIONS An option is a contract, which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date. Option, as the word suggests, is a choice given to the investor to either honour the contract; or if he chooses not to walk away from the contract. Option Styles Settlement of options is based on the expiry date. However, there are two basic styles of options which affect settlement. The styles have geographical names, which have nothing to do with the location where a contract is agreed. The styles are: European: These options give the holder the right, but not the obligation, to buy or sell the underlying instrument only on the expiry date. This means that the option cannot be exercised early. Settlement is based on a particular strike price at expiration. Currently, in India only index options are European in nature. American: These options give the holder the right, but not the obligation, to buy or sell the underlying instrument on or before the expiry date. This means that the option can be exercised early. Settlement is based on a particular strike price at expiration. Options in stocks that have been recently launched in the Indian market are "American Options". TYPES OF OPTIONS:

Call Option

Put Option

Call Option It is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits. Call options usually increase in value as the value of the underlying instrument rises. When one buys a Call option, the price he pays for it, called the option premium, secures his right to buy that certain stock at a specified price called the strike price. If he decides not to use the option to buy the stock, his only cost is the option premium. Illustration: Sam purchases a December call option at Rs 40 for a premium of Rs 15. That is he has purchased the right to buy that share for Rs 40 in December. If the stock rises above Rs 55 (40+15) he will break even and he will start making a profit. Suppose the stock does not rise and instead falls he will choose not to exercise the option and forego the premium of Rs 15 and thus limiting his loss to Rs 15.

Call Options-Long & Short Positions When one expects prices to rise, then he takes a long position by buying calls. He is bullish. When one expects prices to fall, then he takes a short position by selling. He is bearish Put Options

A Put Option gives the holder of the right to sell a specific number of shares of an agreed security at a fixed price for a period of time. The put option gains in value as the value of the underlying instrument decreases. Technically, an option is a contract between two parties. The buyer receives a privilege for which he pays a premium. The seller accepts an obligation for which he receives a fee. Illustration: Raj is of the view that the a stock is overpriced and will fall in future, but he does not want to take the risk in the event of price rising so purchases a put option at Rs 70 on X. By purchasing the put option Raj has the right to sell the stock at Rs 70 but he has to pay a fee of Rs 15 (premium). So he will breakeven only after the stock falls below Rs 55 (70-15) and will start making profit if the stock falls below Rs 55.

Put Options-Long & Short Positions When one expects prices to fall, then he takes a long position by buying Puts. He is bearish. When one expects prices to rise, then he takes a short position by selling Puts. He is bullish.

In-The-Money, At-The-Money, Out-Of-The-Money The strike price, or exercise price, of an option determines whether that contract is in-themoney, at-the-money, or out-of-the-money. If the strike price of a call option is less than the current market price of the underlying security, the call is said to be in-the-money because the holder of this call has the right to buy the stock at a price which is less than the price he would have to pay to buy the stock in the stock market. Likewise, if a put option has a strike price that is greater than the current market price of the underlying security, it is also said to be in-the-money because the holder of this put has the right to sell the stock at a price which is greater than the price he would receive selling the stock in the stock market. The converse of in-the-money is, not surprisingly, out-of-the-money. If the strike price equals the current market price, the option is said to be at-the-money. Option Premium The amount by which an option, call or put, is in-the-money at any given moment is called its intrinsic value. Thus, by definition, an at-the-money or out-of-the-money option has no intrinsic value; the time value is the total option premium. This does not mean, however, these options can be obtained at no cost. Any amount by which an option's total premium exceeds intrinsic value is called the time value portion of the premium. It is the time value portion of an option's premium that is affected by fluctuations in volatility, interest rates, dividend amounts, and the passage of time. Equity call option: In-the-money = strike price less than stock price At-the-money = strike price same as stock price Out-of-the-money = strike price greater than stock price Equity put option: In-the-money = strike price greater than stock price At-the-money = strike price same as stock price Out-of-the-money = strike price less than stock price Option Premium: Intrinsic Value + Time Value

TRADING STRATEGIES FOR OPTIONS

CALL OPTION STRATEGIES Simple Calls in a Bullish Strategy Simple Calls in a Bearish Strategy Bullish Call Spread Strategies Bearish Call Spread Strategies Butterfly Call Spread Strategy

Simple Calls in a Bullish Market An investor with a bullish market outlook should buy call options. If one expects the market price of the underlying asset to rise, then he would rather have the right to purchase at a specified price and sell later at a higher price than have the obligation to deliver later at a higher price.

The investor's profit potential buying a call option is unlimited. The investor's profit is the market price less the exercise price less the premium. The greater the increase in price of the underlying, the greater the investor's profit. The investor's potential loss is limited. Even if the market takes a drastic decline in price levels, the holder of a call is under no obligation to exercise the option. He may let the option expire worthless.

The investor breaks even when the market price equals the exercise price plus the premium. An example will illustrate the above: Suppose there is a call option with a strike price of Rs 2000 and the option premium is Rs 100. The option will be exercised only if the value of the underlying is greater than Rs 2000 (the strike price). If the buyer exercises the call at Rs 2200 then his gain will be Rs 200. However, this would not be his actual gain for that he will have to deduct the Rs 200 (premium) he has paid. The profit can be derived as follows Profit = Market price Strike price Premium. 2200 2000 100 = Rs 100 Simple Calls in a Bearish Market A bearish investor can go short on a call with the intent to purchase it back in the future. By selling a call, one has a net short position and needs to be bought back before expiration and cancel out his position. For this an investor needs to write a call option. If the market price falls, long call holders will let their out-of-the-money options expire worthless, because they could purchase the underlying asset at the lower market price.

The investor's profit potential is limited because the trader's maximum profit is limited to the premium received for writing the option.

Here the loss potential is unlimited because a short call position holder has an obligation to sell if exercised; he will be exposed to potentially large losses if the market rises against his position. Bullish Call Spread Strategies A vertical call spread is the simultaneous purchase and sale of identical call options but with different exercise prices. To "buy a call spread" is to purchase a call with a lower exercise price and to write a call with a higher exercise price. The trader pays a net premium for the position. An investor with a bullish market outlook should buy a call spread. The "Bull Call Spread" allows the investor to participate to a limited extent in a bull market, while at the same time limiting risk exposure.

To put on a bull spread, the trader needs to buy the lower strike call and sell the higher strike call. The combination of these two options will result in a bought spread. The cost of Putting on this position will be the difference between the premium paid for the low strike call and the premium received for the high strike call.

The investor's profit potential is limited. When both calls are in-the-money, both will be exercised and the maximum profit will be realized. The investor delivers on his short call and receives a higher price than he is paid for receiving delivery on his long call. The investors potential loss is limited. At the most, the investor can lose is the net premium. He pays a higher premium for the lower exercise price call than he receives for writing the higher exercise price call. The investor breaks even when the market price equals the lower exercise price plus the net premium.

Bearish Call Spread Strategies A vertical call spread is the simultaneous purchase and sale of identical call options but with different exercise prices. To "sell a call spread" is to purchase a call with a higher exercise price and to write a call with a lower exercise price, and receive a net premium for the position. To put on a bear call spread the trader sells the lower strike call and buys the higher strike call. An investor with a bearish market outlook should: sell a call spread. The "Bear Call Spread" allows the investor to participate to a limited extent in a bear market, while at the same time limiting risk exposure.

The investor's profit potential is limited. When the market price falls to the lower exercise price, both out-of-the-money options will expire worthless. The maximum profit that the

trader can realize is the net premium, the premium he receives for the call at the higher exercise price. Here the investor's potential loss is limited. If the market rises, the options will offset one another. At any price greater than the high exercise price, the maximum loss will equal high exercise price minus low exercise price minus net premium. The investor breaks even when the market price equals the lower exercise price plus the net premium. The strategy becomes profitable as the market price declines.

Butterfly Call Spread Strategy The butterfly call spread is a combination of a bull spread and a bear spread, utilizing calls and three different exercise prices. A butterfly call spread involves:

Buying a call with a low strike price K1 Writing two calls with a mid-range strike price,K2 Buying a call with a high strike price,K3

The investor's profit potential is limited. This spread leads to profit if the stock price stays close to K2. Maximum profit is attained when the market price of the underlying interest equals the mid-range exercise price (if the exercise prices are symmetrical).

The investor's potential loss is: limited. This spread gives rise to a small loss if there is a significant stock price move in either direction. The maximum loss is limited to the net premium paid and is realized when the market price of the underlying asset is higher than the high exercise price or lower than the low exercise price. PUT OPTION STRATEGIES Simple Puts in a Bearish Market Simple Puts in a Bullish Market Bearish Put Spread Strategies Bullish Put Spread Strategies Butterfly Put Spread Strategy

Simple Puts in a Bearish Market When one purchases a put he is going long and wants the market to fall. A put option is a bearish position. It will increase in value if the market falls. An investor with a bearish market outlook shall buy put options. By purchasing put options, the trader has the right to choose whether to sell the underlying asset at the exercise price.

An investor's profit potential is practically unlimited. The higher the fall in price of the underlying asset, higher the profits. The investor's potential loss is limited. If the price of the underlying asset rises instead of falling as the investor has anticipated, he may let the option expire worthless. At the most, he may lose the premium for the option. The trader's breakeven point is the exercise price minus the premium. To profit, the market price must be below the exercise price. Since the trader has paid a premium he must recover the premium he paid for the option. Simple Puts in a Bullish Market An investor with a bullish market outlook can also go short on a Put option. Basically, an investor anticipating a bull market could write Put options. If the market price increases and puts become out-of-the-money, investors with long put positions will let their options expire worthless.

By writing Puts, profit potential is limited. A Put writer profits when the price of the underlying asset increases and the option expires worthless. The maximum profit is limited to the premium received. However, the potential loss is unlimited. Because a short put position holder has an obligation to purchase if exercised. He will be exposed to potentially large losses if the market moves against his position and declines.

Bearish Put Spread Strategies A vertical put spread is the simultaneous purchase and sale of identical put options but with different exercise prices. To "buy a put spread" is to purchase a put with a higher exercise price and to write a put with a lower exercise price. The trader pays a net premium for the position. To put on a bear put spread one has to buy the higher strike put and sell the lower strike put. An investor with a bearish market outlook should: buy a put spread. The "Bear Put Spread" allows the investor to participate to a limited extent in a bear market, while at the same time limiting risk exposure.

The investor's profit potential is limited. When the market price falls to or below the lower exercise price, both options will be in-the-money and the trader will realize his maximum profit when he recovers the net premium paid for the options. The investor's potential loss is limited. The trader has offsetting positions at different exercise prices. If the market rises rather than falls, the options will be out-of-the-money and expire worthless. Since the trader has paid a net premium The investor breaks even when the market price equals the higher exercise price less the net premium. For the strategy to be profitable, the market price must fall. When the market price falls to the high exercise price less the net premium, the trader breaks even.

Bullish Put Spread Strategies A vertical Put spread is the simultaneous purchase and sale of identical Put options but with different exercise prices. To "sell a put spread" is to purchase a Put with a lower exercise price and to write a Put with a higher exercise price, and receive a net premium for the position. An investor with a bullish market outlook should sell a Put spread. The "vertical bull put spread" allows the investor to participate to a limited extent in a bull market, while at the same time limiting risk exposure.

The investor's profit potential is limited. When the market price reaches or exceeds the higher exercise price, both options will be out-of-the-money and will expire worthless. The trader will realize his maximum profit, the net premium. The investor's potential loss is also limited. If the market falls, the options will be in-themoney. The puts will offset one another, but at different exercise prices. The investor breaks-even when the market price equals the lower exercise price less the net premium. The investor achieves maximum profit i.e. the premium received, when the market price moves up beyond the higher exercise price (both puts are then worthless).

Butterfly Put Spread Strategy The butterfly put spread is a combination of a bull spread and a bear spread, utilizing puts and three different exercise prices. A butterfly put spread involves:

Buying a put with a low strike price Writing two puts with a mid-range strike price Buying a put with a high strike price

COMBINATIONS A combination is an option trading strategy that involves taking a position in both calls and puts on the same stock Straddle Volatile market trading strategies are appropriate when the trader believes the market will move but does not have an opinion on the direction of movement of the market. As long as there is significant movement upwards or downwards, these strategies offer profit opportunities. A trader need not be bullish or bearish. He must simply be of the opinion that the market is volatile. A straddle is the simultaneous purchase of a call and a put with the same strike price and expiration date. A trader, viewing a market as volatile, should buy option straddles. A "straddle purchase" allows the trader to profit from either a bull market or from a bear market.

Here the investor's profit potential is unlimited. If there is a sufficiently large move in the stock price in either direction, a significantly profit will result. If the market is volatile, the trader can profit from an up- or downward movement by exercising the appropriate option while letting the other option expire worthless. (Bull market, exercise the call; bear market, the put.) While the investor's potential loss is limited. If the stock price is close to the strike price at expiration date, the straddle leads to a loss. If the price of the underlying asset remains stable instead of either rising or falling as the trader anticipated, the most he will lose is the premium he paid for the options.. In this case the trader has long two positions and thus, two breakeven points. One is for the call, which is exercise price plus the premiums paid, and the other for the put, which is exercise price minus the premiums paid. Strangles A strangle is similar to a straddle, except that the call and the put have different exercise prices. To "buy a strangle" is to purchase a call and a put with the same expiration date, but different exercise prices. A trader, viewing a market as volatile, should buy strangles. A "strangle purchase" allows the trader to profit from either a bull or bear market. Because the options are typically out-of-the-money, the market must move to a greater degree than a straddle purchase to be profitable.

The trader's profit potential is unlimited. If the market is volatile, the trader can profit from an up- or downward movement by exercising the appropriate option, and letting the other expire worthless. (In a bull market, exercise the call; in a bear market, the put). The investor's potential loss is limited. Should the price of the underlying remain stable, the most the trader would lose is the premium he paid for the options. Here the trader has two long positions and thus, two breakeven points. One for the call, which breakevens when the market price equal the high exercise price plus the premium paid, and for the put, when the market price equals the low exercise price minus the premium paid.

ANALYSIS AND FINDINGS

METHODOLOGY
The data pertaining to options trading and closing stock prices of Bharti Airtel ,Infosys and Mahindra & Mhindra has been collected. The options contracts for the first trading day of April i.e. April 2nd 2007 have been selected for the purpose of analysis. The options contracts of Bharti Airtel have been selected such that the stock price is greater than the strike prices. The options contracts of Infosys have been selected such that the stock price is lesser than the strike prices. The options contracts of Mahindra & Mahindra have been selected such that the stock price lies between the strike prices. The strategies for the Call options and Put options in Bear and Bull Market have been worked out separately. The profit for every strategy has been calculated and a comparison has been made and thereby a conclusion has been drawn as to which strategy yields the highest profit in a particular market condition.

ASSUMPTIONS
For the purpose of analysis it has been assumed that the options are exercised on their respective expiry dates. The closing stock prices on the expiry date are taken into consideration for calculating the profit.

BHARTI AIRTEL
The options contracts of Bharti Airtel have been selected such that the stock price is greater than the strike prices and these contracts are as on April 2nd 2007.

CALL OPTIONS STRATEGIES Bull Spread

Bullish Call Spread is created by purchasing a call with a lower exercise price and writing a call with a higher exercise price.

Long Call (A) K1 P1 720 32.5

Short Call (B) K2 P2 800 7.2

Stock Price ST on expiry date 26th April 2007 was 863.2 (ST >K1 & K2) Profit from A = ST - K1 - P1 = 863.2 - 720 - 32.5 Profit from B = K2 ST + P2 = 800 - 863.2 + 7.2

= 110.7 Total Profit = 110.7 - 56 = 54.7

= - 56

Bear Spread
Bearish Call Spread is created by purchasing a call with higher exercise price and writing a call with a lower exercise price.

Long Call (A)

Short Call (B)

K1 P1

800 7.2

K2 P2

720 32.5

Profit from A = ST - K1 - P1 = 863.2 800 - 7.2

Profit from B = K2 ST + P2 = 720 - 863.2 + 32.5

= 56

= - 110.7

Total Profit = -110.7 + 56 = - 54.7

Butterfly Spread
A butterfly call spread is created by buying a call with a relatively low strike price, buying a call with a relatively high strike price and writing two calls with a mid-range strike price.

First Long Call (A) K1 P1 720 32.5

Second Long Call (B) K3 P3 800 7.2

Two Short Calls (C) K2 P2 760 17.05

Profit from A = ST - K1 - P1 = 863.2 - 720 - 32.5 = 110.7 Profit from B = ST K3 P3 = 863.2 800 7.2 = 56 Profit from C = K2 ST + P2

= 760 - 863.2 + 17.05

= - 86.15
Two Short Calls, therefore = 2 (- 86.15) = -172.3 Total Profit = 110.7 + 56 172.3 = - 5.6

PUT OPTIONS STRATEGIES Bull Spread

Bullish Put Spread is created by purchasing a put with a lower exercise price and writing a put with a higher exercise price

Long Put (A)

K1 P1

720 30

Short Put (B) K2 P2 740 38.55

Stock Price ST on expiry date 26th April 2007 was 863.2 (ST >K1 & K2) Profit from A = - P1 = - 30 Profit from B = P2 = 38.55 Total Profit = 38.55 - 30 = 8.55

Bear Spread
Bearish Put Spread is created by purchasing a put with higher exercise price and writing a put with a lower exercise price.

Long Put (A) K1 P1 740 38.55

Short Put (B) K2 P2 720 30

Profit from A = - P1 = - 38.55 Profit from B = P2 = 30

Total Profit = - 38.55 + 30 = - 8.55

Butterfly Spread
A butterfly put spread is created by buying a put with a relatively low strike price, buying a put with a relatively high strike price and writing two puts with a mid-range strike price.

First Long Put (A) K1 P1 700 20

Second Long Put (B) K3 P3 740 38.55

Two Short Puts (C) K2 P2 720 30

Profit from A = - P1 = - 20 Profit from B = - P3 = - 38.55 Profit from C = P2

= 30 Two Short Puts, therefore = 2 (30) = 60 Total Profit = - 38.55 - 20 + 60 = 1.45

COMBINATIONS A combination is an option trading strategy that involves taking a position in both calls and puts on the same stock

Straddle
A straddle is the simultaneous purchase of a call and a put with the same strike price and expiration date.

Long Call (A)

K1 P1

720 32.5

Long Put (B)

K2 P2

720 30

Profit from A = ST - K1 - P1 = 863.2 - 720 - 32.5 = 110.7 Profit from B = - P2 = - 30 Total Profit = 110.7 - 30 = 80.7

Strangle
Strangle is to purchase a call and a put with the same expiration date, but different strike prices.

Long Call (A) K1 P1 800 7.2

Long Put (B)

K2 P2

720 30

Profit from A = ST - K1 - P1 = 863.2 - 800 - 7.2 = 56 Profit from B = - P2 = - 30 Total Profit = 56 - 30 = 26

INFOSYS
The options contracts of Infosys have been selected such that the stock price is lesser than the strike prices and these contracts are as on April 2nd 2007.

CALL OPTIONS STRATEGIES Bull Spread

Bullish Call Spread is created by purchasing a call with a lower exercise price and writing a call with a higher exercise price.

Long Call (A)

K1

2040

P1

49.1

Short Call (B) K2 P2 2100 30.05

Stock Price ST on expiry date 26th April 2007 was 2018.85 (ST < K1 & K2) Profit from A = - P1 = - 49.1

Profit from B = P2 = 30.05

Total Profit = -49.1 30.05 = -19.05

Bear Spread
Bearish Call Spread is created by purchasing a call with higher exercise price and writing a call with a lower exercise price.

Long Call (A) K1 P1 2100 30.05

Short Call (B) K2 P2 2040 49.1

Profit from A = - P1 = - 30.05 Profit from B = P2 = 49.1 Total Profit = 49.1-30.05 = 19.05

Butterfly Spread
A butterfly call spread is created by buying a call with a relatively low strike price, buying a call with a relatively high strike price and writing two calls with a mid-range strike price.

First Long Call (A) K1 P1 2040 49.1

Second Long Call (B) K3 P3 2100 30.05

Two Short Calls (C) K2 P2 2070 39.3

Profit from A = - P1 = - 49.1 Profit from B = P3 = - 30.05 Profit from C = P2 = 39.3 Two Short Calls, therefore = 2 (39.3) = 78.6 Total Profit =-49.1- 30.05 +78.6 =-1

PUT OPTIONS STRATEGIES Bull Spread

Bullish Put Spread is created by purchasing a put with a lower exercise price and writing a put with a higher exercise price

Long Put (A)

K1 P1

2040 130

Short Put (B) K2 P2 2100 174

Stock Price ST on expiry date 26th April 2007 was 2018.85 (ST < K1 & K2) Profit from A = K1- ST - P1 = 2040-2018.85-130 = -108.85 Profit from B = ST- K2 - P2 = 20.18.85-2100+174 = 92.85 Total Profit = -108.85 + 92.85 = -16

Bear Spread
Bearish Put Spread is created by purchasing a put with higher exercise price and writing a put with a lower exercise price.

Long Put (A) K1 P1 2100 174

Short Put (B) K2 P2 2040 130

Profit from A = K1- ST - P1 = 2100- 2018.85-174 = -92.85 Profit from B = ST- K2 - P2 = 3018.85 2040 + 130 = 108.85 Total Profit = 108.85 92.85 = 16

Butterfly Spread
A butterfly put spread is created by buying a put with a relatively low strike price, buying a put with a relatively high strike price and writing two puts with a mid-range strike price.

First Long Put (A) K1 P1 2040 130

Second Long Put (B)

K3 P3

2100 174

Two Short Puts (C) K2 P2 2060 148

Profit from A = K1- ST - P1 = 2040 2018.85 130 = -108.85 Profit from B = K3- ST P3 = 2100 201.8.85 - 174 = -92.85 Profit from C = ST- K2 + P2 = 2018.85 2060 + 148 = 106.85 Two Short Puts, therefore = 2 (106.85) = 213.7

Total Profit = 213.7-108.85-92.85 = 12

COMBINATIONS A combination is an option trading strategy that involves taking a position in both calls and puts on the same stock

Straddle
A straddle is the simultaneous purchase of a call and a put with the same strike price and expiration date.

Long Call (A)

K1 P1

2100 30.05

Long Put (B) K2 P2 2100 174

Profit from A = - P1 = - 30.05 Profit from B = K2 - ST - P2 = 2100- 2018.85 - 174 = - 92.85 Total Profit = - 30.05 92.85 = - 122.9

Strangle
Strangle is to purchase a call and a put with the same expiration date, but different strike prices.

Long Call (A) K1 P1 2100 30.05

Long Put (B)

K2 P2

2040 130

Profit from A = - P1 = - 30.05 Profit from B = K2 - ST - P2 = -2040- 2018.85- 130 = -108.85 Total Profit = -30.05-108.85 = - 138.9

Mahindra & Mahindra

The options contracts of Mahindra & Mahinmdra have been selected such that the stock price lies between the strike prices and these contracts are as on April 2nd 2007

Bull Spread
Bullish Call Spread is created by purchasing a call with a lower exercise price and writing a call with a higher exercise price.

Long Call (A) K1 P1 740 23.5

Short Call (B) K2 P2 780 33.5

Stock Price ST on expiry date 26th April 2007 was 766.6 Profit from A = ST - K1 - P1 = 766.6 - 740 23.5 = 3.1 Total Profit = 3.1 + 33.5 = 36.6 Profit from B = P2 = 33.5

Bear Spread
Bearish Call Spread is created by purchasing a call with higher exercise price and writing a call with a lower exercise price.

Long Call (A)

Short Call (B)

K1 P1

780 733.5

K2 P2

740 23.5

Profit from A = - P1 = -33.5

Profit from B = K2 ST + P2 = 740-766.6+23.5

= - 3.1
Total Profit = -33.5-3.1 = - 36.6

Butterfly Spread
A butterfly call spread is created by buying a call with a relatively low strike price, buying a call with a relatively high strike price and writing two calls with a mid-range strike price. First Long Call (A) K1 P1 740 23.5

Second Long Call (B) K3 P3 800 8.3

Two Short Calls (C) K2 P2 780 33.5

Profit from A = ST - K1 - P1 = 766.6 - 740 23.5 = 3.1 Profit from B = P3 = 7.2 Profit from C = P2 = 33.5 Two Short Calls, therefore = 2 (33.5) = 67 Total Profit = -7.2+33.5+67 = 61.8

PUT OPTIONS STRATEGIES Bull Spread

Bullish Put Spread is created by purchasing a put with a lower exercise price and writing a put with a higher exercise price

Long Put (A)

K1 P1

740 40

Short Put (B)

K2 P2

780 26.5

Stock Price ST on expiry date 26th April 2007 was 766.6 (K1<ST<K2) Profit from A = - P1 = - 40 Profit from B = ST-K2-P2 = 766.6-780+26.5 =13.1 Total Profit = -40+13.1 = -26.9

Bear Spread
Bearish Put Spread is created by purchasing a put with higher exercise price and writing a put with a lower exercise price.

Long Put (A) K1 P1 780 26.5

Short Put (B) K2 P2 740 40

Profit from A = K1-ST- P1

= 780-766.6-26.5 = -13.1 Profit from B = P2 = 40 Total Profit = - 13.1+40 = 26.9

Butterfly Spread
A butterfly put spread is created by buying a put with a relatively low strike price, buying a put with a relatively high strike price and writing two puts with a mid-range strike price.

First Long Put (A) K1 P1 740 40

Second Long Put (B) K3 P3 800 27.95

Two Short Puts (C) K2 P2 780 26.5

Profit from A = - P1 = - 40

Profit from B = K3-ST-P3 = 800-766.6-27.95 = 5.44 Profit from C = ST-K2+P2 = 766.6-780+26.5 = 13.1 Two Short Puts, therefore = 2 (13.1) = 26.2 Total Profit = -40+5.44+26.2 = -8.36

COMBINATIONS A combination is an option trading strategy that involves taking a position in both calls and puts on the same stock

Straddle
A straddle is the simultaneous purchase of a call and a put with the same strike price and expiration date.

Long Call (A)

K1

800

P1

8.3

Long Put (B) K2 P2 800 27.95

Profit from A = - P1 = -8.3 Profit from B = K2-ST - P2 = 800-766.6-27.95 = 5.45 Total Profit = -8.3+5.45 = -2.85

Strangle
Strangle is to purchase a call and a put with the same expiration date, but different strike prices.

Long Call (A) K1 P1 800 8.3

Long Put (B)

K2 P2

740 40

Profit from A = - P1 = -8.3 Profit from B = - P2 = - 40 Total Profit = -8.3-40 = -48.3

FINDINGS
BHARTI AIRTEL Call Option Strategies The call option strategies worked out for Bharati Airtel reveal that when the stock price on expiry date is greater than the strike price the Bull Spread is profitable. Here both the calls are in-the-money, and therefore the trader realizes maximum profit. This bull spread is considered to be the most aggressive one. Bear spread for the same has given an equal amount of loss. Loss has occurred because the initial investment is more than the pay off. Butterfly spread leads to profit when the stock price is close to strike price, but for the data selected it has been observed that the stock price on expiry date is farther away from the strike price, there fore the butterfly has resulted in a small loss. Put Option Strategies The put option strategies worked out for Bharati Airtel reveal that when the stock price is greater than the strike price the bull spread is profitable and the profit is equivalent to the net premium received, which is the maximum profit that can be realized from this strategy. The Bear Spread has resulted in an equal amount of loss and is equivalent to the premium paid for the strategy.

 Butterfly spread has resulted in a very small amount of profit as the stock price is significantly higher than the strike price. All the puts are out of money and the net premium is positive.

Combinations The straddles strategy has resulted in a significant amount of profit as there is a large move in the stock price on the exercise date. It is seen in the strangle strategy that the strike prices of call and put are not very close, in such a condition the stock price has to move farther away to make a profit.

INFOSYS Call Option Strategies The call option strategies worked out for Infosys reveal that when stock price is lesser than the stock price, the Bear Spread is profitable. Both the calls are out-ofmoney and they have repaired expired worthless. The maximum profit released is the net premium received. Bull spread for the same has given an equal amount of loss, and this is equivalent to the net premium paid. Butterfly Spread has resulted in a small loss as the stock price is farther away from strike prices. All the calls are out-of-money and have remained unexercised.

Loss has occurred as the premium is paid on long calls is greater than the premium received from short calls. Put Option Strategies The put option strategies worked out for Infosys reveal that Bear Spread is profitable. Here the stock price has fallen below the lower strike price. Both the options are in the money and the trader has realized a maximum profit. Bull spread has resulted in an equal amount of loss. The butterfly spread has resulted in profit as the stock price is close to the strike prices. Combinations Straddle and strangle have resulted in loss as the stock price on the day of exercise is close to the strike prices. Only if there is a larger move in strike price in either direction, a significant profit will result.

Mahindra and Mahindra Call Option Strategies The call option strategies worked out for Infosys reveal that when stock price is between strike price, the bull spread is profitable. Here the long call is exercised while the short call expires unexercised. Bear spread leads to equal amount of loss. Loss has occurred as the long call is unexercised and the initial investment is more than the profit.

 In the butterfly spread it is observed that the stock price on expiry date lies between K1 & K2. This spread has resulted in significant profit.

Put Option Strategies The bear spread is profitable. Here the long put is exercised, while the short put remains unexercised. Profit has resulted as the net premium received is more than loss on the long put. Bull spread has resulted in equal amount of loss as initial investment has exceeded the profit. Butterfly spared has resulted in a small loss, as the stock price has not moved favorably. Combinations Straddle has resulted in loss because the stock price has not moved significant enough. As the stock price is lesser than the strike price the call option has remained unexercised and the premium paid has exceeded the pay off from long put. Strangle has lead to griever losses because both the options are out-of-money and have therefore not been exercised. The loss is equal to the premium paid.