“A project report on EQUITIES–Cash & Derivatives”

Executive Summary

In few years Share Market has emerged as a tool for ensuring one’s financial well being. Share Markets have not only contributed to the India growth story but have also helped families tap into the success of Indian Industry. As information and awareness is rising more and
more people are enjoying the benefits of investing in Share Markets. once people are aware of Share Market investment opportunities, the number who decide to invest in Share Markets increases to as many as one in every five people. This Project gave me a great learning experience and at the same time it gave me enough scope to implement my analytical ability. The first part gives an insight about Share Market and its various aspects, the Company Profile, Objective of the study, Research Methodology. One can have a brief knowledge about Share market and its basics through the project.
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The second part of the Project consists of Friday market analysis collected from past records This Project covers the topic of “ FRIDAY MARKET INVESTING PLAN ” The data collected has been well organized and presented. I hope the research findings and conclusion will be of use.

Consortium is one of the leading broking houses in India that provides a wide range of services nationwide to a substantial and diversified client base that includes retail clients, high net worth individuals, corporates and financial institutions. We are committed to our distinctive culture and core values, which always place our client's interests first. Our values emphasise integrity, transparency, commitment to excellence and teamwork.

Over a short span of a decade, we have made tremendous
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strides that have taken us to the enviable position of one of the leading retail broking house in the country. The company acquired membership of National Stock Exchange equity segment in 1996, acquired membership of National Stock Exchange futures and options segment as a clearing and trading member in 2000, acquired membership of Bombay Stock Exchange (BSE) in 2000, became a depository participant with National Securities Depository Ltd. (NSDL) in 2001, acquired membership of two premier Commodities Exchanges of India, namely NCDEX and MCX in 2004. The basic strength of the company lies in technology. The company has integrated trading screen, wherein the client can trade on NSE, BSE and Derivatives on the single screen. We have a large number of CTCL (computer to computer link) installations with technology provided by Financial Technologies and NSE IT. HCL Comnet has connected many branches/franchisees of Consortium through a private VSAT network (VPN), which is very customer friendly and competitive. The company also has commodities trading on the private VSAT network (VPN).

The spectrum of back office functions is totally automated.
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This shall ensure that the stock payout to the clients and such other functions are carried out without manual intervention, thus enhancing efficiency to highest levels. Our back-office is on a highly secure oracle database.

Consortium has a very scientific risk management system in place. The company has a separate surveillance and monitoring department, where highly efficient and experienced personnel are in charge of close monitoring of terminal operations throughout the trading hours. Each and every branch/franchisee is under continuous watch as regards exposures, margins, timely payment of cash and shares, turnover, mark to market profits/losses and so on. With substantial investment in technology, and a team of hardcore professionals, the company is confident of bringing to the common investor the highest standards of service.

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MANAGEMENT TEAM Our senior Management comprises a diverse talent pool that brings together rich experience from across industry as well as financial services.Group Chairman Chartered Accountant Held several Senior Management positions with one of India's largest industrial groups Mr. Evaluation. Monitoring and Process Outsourcing Company. Mr. Chartered Accountant Plus 20 years of experience in Financial Services Page | 5 . P S Kalra . Rohit Arora – Founder Director of AR Credit Information Services.

. 14 .Awards………………………………………………. 17 . 17 History of NSE……………………………………….. Segment…………………………………………… 23 Compulsory Rolling Settlement (CRS) Segment……… 23 Trading and settlement cycle for scrip’s under CRS.. 6.. Demat pay-in………………………………………. 18 Role of SEBI…………………………………………… 19 .26 Settlement…………………………………………………….Mr. Introduction…………………………………………… 20 Listed Securities…………………………………… 22 Permitted Securities………………………………… 22 Tick Size………………………………………… 22 Computation of closing price of scrip’s in the Cash . History of BSE……………………………………….. 2. 30 Page | 6 .. 30 Auto delivery facility……………………………….. 3. P KhuranaChartered Accountant Plus 28 years of experience in Financial Service Table of Contents 1.Vision ……………………………………………… 15 ..Board members of SEBI 4. 5.Services…………………………………………….

Eligibility for any stock to enter in derivative market……. 33 Dematerialization of shares………………………….... Futures and options………………………………………….39 capturing behavior of portfolios……………………… . The index number…………………………………………… 38 desirable attribute of an index………………………….... 43 derivative market at nse………………………………..54 12. 36 falling marker and increasing open interest……………....52 – initial margin………………………………………. Pay-in of securities in physical form…………………31 Funds Pay-in………………………………………… 32 Securities Pay-out……………………………….………………………….51 – pricing futures……………………………………….... 41 9..40 maintaining professionally……………………………. 34 Rematerialization.…. Future terminology………………………………………….44 index derivatives………………………………………45 10. 37 sideways marker and increasing open interest……………38 8...56 Page | 7 ....40 including liquid stocks………………………………….. Convergence of futures price to spot price…………………54 mark to market (mtm) margin………………………..41 – impact cost……………………………………………. ……………………………… 34 Open interest in derivative market………………………… 35 - What is open interest…………………………………….32 Funds Payout…. 53 initial margin charged on f & o market…………….. Crore)……………………………………49 11.7.…………………………………….50 trading mechanism………………………………….42 trading underlying versus trading single stock futures. turnover(rs. 36 Rising market and decreasing open interest……………. . 35 Rising market and increasing open interest………….50 volumes………………………………………………51 index derivatives for hedging……………………….45 – business growth of futures and options market ...33 Merits of Dematerialization. 37 falling marker and decreasing open interest…………….



15. 16. 17. 18.

– open interest calculation with example……………...57 Options………………………………………………………..58 option terminology…………………………………..59 strategies in futures and options……………………..62 Buying a call option………………………………………….63 – buying a put…………………………………………66 writing the call options………………………………68 writing the buy options………………………………70 Firday market analysis……………………………………….73 Conclusion………………………………………………….....79 Suggestions …………………………………………………..81 Bibliography………………………………………………….84

Bombay Stock Exchange Limited (the Exchange) is the oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely

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recognized and its index, SENSEX, is tracked worldwide.

India's oldest and first stock exchange: Mumbai (Bombay) Stock

Exchange. Established in 1875. More than 6,000 stocks listed.
• • •

Total number of stock exchanges in India: 22 They are in: Ahmedabad, Bangalore, Calcutta, Chennai, Delhi etc. There is also a National Stock Exchange (NSE) which is located in


There is also an Over the Counter Exchange of India (OTCEI)

which allows listing of small and medium sized companies.

The regulatory agency which oversees the functioning of stock

markets is the Securities and Exchange Board of India (SEBI), which is also located in Bombay.

Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the world's
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5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion.

BSE also has a wide range of services to empower investors and facilitate smooth transactions:

Investor Services: The Department of Investor Services redresses grievances of investors. BSE was the first exchange in the country to provide an amount of Rs.1 million towards the investor protection fund; it is an amount higher than that of any exchange in the country. BSE launched a nationwide investor awareness programme- 'Safe Investing in the Stock Market' under which 264 programmes were held in more than 200 cities.

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The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line screen based trading in securities. BOLT is currently operating in 25,000 Trader Workstations located across over 359 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the world's first centralized exchange-based Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in the world to trade on the BSE platform.

Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis the price movements, volume positions and members' positions and real-time measurement of default risk, market reconstruction and generation of cross market alerts.

BSE Training Institute: BTI imparts capital market training and certification, in collaboration with reputed management institutes and universities. It offers over 40 courses on various aspects of the capital market and financial sector. More than 20,000 people have attended the BTI programmes

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2006 and March 31 2007 have been awarded the ICAI awards for excellence in financial reporting.Awards The World Council of Corporate Governance has awarded the Golden Peacock Global CSR Award for BSE's initiatives in Corporate Social Responsibility (CSR). • The Human Resource Management at BSE has won the Asia Page | 12 . • • The Annual Reports and Accounts of BSE for the year ended March 31.

NSE was set up by leading institutions to provide a modern. BSE will continue to remain an icon in the Indian capital market Vision "Emerge as the premier Indian stock exchange by establishing global benchmarks" The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country.Pacific HRM awards for its efforts in employer branding through talent management at work. health management at work and excellence in HR through technology Drawing from its rich past and its equally robust performance in the recent times.. Page | 13 .

The Exchange has brought about unparalleled transparency. NSE has played a catalytic role in reforming the Indian securities market in terms of microstructure. fine-tuned risk management systems. dematerialisation and electronic transfer of securities. compression of settlement cycles. Page | 14 . speed & efficiency. demutualisation of stock exchange governance. safety and market integrity. professionalisation of trading members.fully automated screen-based trading system with national reach. market practices and trading volumes. screen based trading. securities lending and borrowing. The market today uses state-of-art information technology to provide an efficient and transparent trading. and has witnessed several innovations in products & services viz. clearing and settlement mechanism.

SEBI is controlled by a statutory board consisting of one chairman and six members. SEBI’s main objective is to protect the interest of investors.Securities and Exchange Board of India (SEBI): The Securities and Exchange Board of India (SEBI) is an autonomous body established by an act of parliament in 1992. Page | 15 .

‘S'. SEBI is a market regulator whose major functions include regulation.m. training and education of investors. 'B2'. 'B1'. superintendence and control of all securities markets in India.'T'. value traded. ‘TS' and 'Z' groups on certain qualitative and quantitative parameters which include number of trades. The “F” Group represents the Fixed Income Securities. The “T” Group represents scrip's which are settled on a trade to trade basis as a surveillance measure. ‘TS' 'F' . The scrip’s traded on the Exchange have been classified into 'A'. 'B2'. and 3:30 p. ‘S'. etc.and to regulate all securities market particularly the share market. framing rules for and regulating public issues. TRADING Trading on the BOLT System is conducted from Monday to Friday between 9:55 a.'G' and 'Z' groups.m. 'B1'. framing rules for trading practices. The Exchange has for the guidance and benefit of the investors have classified the scrip’s in the Equity Segment into 'A'. overseeing the functioning of stock exchanges. and all matters pertaining to market intermediaries. Page | 16 . attending to and removing investor grievances.'T'.

'S'.The “S” Group represent scrip’s forming part of the “ BSE-Indonext” segment . ‘TS' and 'Z' groups and Rights renunciations in all the groups of scrip’s in the Equity Segment. Central Depository Services (I) Ltd. 'B2' ‘T'. The “TS” Group consist of scrip’s in the “ BSE-Indonext” segment which are settled on a trade to trade basis as a surveillance measure. The 'Z' group was introduced by the Exchange in July 1999 and includes the companies which have failed to comply with the listing requirements of the Exchange and/or have failed to resolve investor complaints or have not made the required arrangements with both the Depositories.. trading in all securities listed in equity segment of the Exchange takes place in one market segment.. Securities for retail investors is done under "G" group. Trading in Govt. 2001. The scrip’s of the companies which are in demat can be traded in market lot of one but the securities of companies which are still in the Page | 17 . With effect from December 31. viz. Compulsory Rolling Settlement Segment (CRS). The Exchange also provides a facility to the market participants for online trading of odd-lot securities in physical form in 'A'. (CDSL) and National Securities Depository Ltd. (NSDL) for dematerialization of their securities. 'B1'. viz.

the investors having quantities of securities less than the market lot are required to sell them as "Odd Lots". the Exchange has in Page | 18 . Baring a few scrip’s. This facility of selling physical shares in compulsory demat scrips is called an Exit Route Scheme. all scrip’s traded in the Equity Segment at the Exchange fall in this category. However. The facility of trading in odd lots of securities not only offers an exit route to investors to dispose of their odd lots of securities but also provides them an opportunity to consolidate their securities into market lots.physical form are traded on the Exchange in the market lot of generally either 50 or 100. Permitted Securities: To facilitate the market participants to trade in securities of the companies which are actively traded at other Regional Stock Exchanges but are not listed on the Exchange. Listed Securities: The securities of companies which have signed Listing Agreement with the Exchange are traded at the Exchange as "Listed Securities". This facility can also be used by small investors for selling upto 500 shares in physical form in respect of scrips of companies where trades are required to be compulsorily settled by all investors in demat mode.

is revised to 1 paise on the first trading day of month. the tick size in various scrip’s quoting upto Rs.e.15/. Computation of closing price of scrip’s in the Cash Segment: The closing price of scrip's is computed by the Exchange on the basis of weighted average price of all trades executed during the last 30 Page | 19 . Tick Size: Tick size is the minimum differences in rates between two orders on the same side i. in order to increase the liquidity and enable the market participants to put orders at finer rates. However.on the last trading day of the calendar month. buy or sell. Trading in scrip’s listed on the Exchange is done with the tick size of 5 paise. securities traded in "F" group and equity shares having closing price upto Rs. entered on the system for particular scrip. The tick size so revised on the first trading day of month remains unchanged during the month even if the prices of scrip’s undergo change.. Accordingly.April 2002 decided to permit trading in such securities as “Permitted Securities" provided they meet the relevant norms specified by the Exchange. the Exchange has reduced the tick size from 5 paise to 1 paise in case of units of mutual funds. 15/.

i. i. A T+2 settlement cycle means that the final settlement of transactions done on T. which are in "Z" group or have been placed under "trade to Page | 20 . buy and sell positions of a member-broker in the same scrip are netted and the net quantity and value is required to be settled. 2003. if there is no trade recorded during the last 30 minutes. However.minutes of the continuous trading session. The settlement calendar. then the last traded price of scrip in the continuous trading session is taken as the official closing price.e. Under rolling settlements.f..e. trade day by exchange of monies and securities between the buyers and sellers respectively takes place on second business day (excluding Saturdays. the trades done on a particular day are settled after a given number of business days. which indicates the dates of the various settlement related activities. transactions in securities of companies. from April 1. bank and Exchange trading holidays) after the trade day. Sundays. Compulsory Rolling Settlement (CRS) Segment: As per the directive by SEBI. is drawn by the Exchange in advance and is circulated among the market participants.e. all transactions in all groups of securities in the Equity Segment and Fixed Income securities listed on the Exchange are required to be settled on T+2 basis w. However.. The transactions in securities of companies which have made arrangements for dematerialization of their securities are settled only in demat mode on T+2 on net basis.

trade" by the Exchange as a surveillance measure (“T” and “TS” group) .e. Sunday. The Exchange has introduced a new segment named “BSE Indonext” w. January 7. The members are required to make payment for securities sold and/ or deliver securities purchased to their clients within one working day (excluding Saturday. “S” group consists of scrips from “B1” & “B2” group on BSE and companies exclusively listed on regional stock exchanges having capital of 3 crores to 30 crores. This is the timeframe permitted to the members of the Exchange to settle their funds/ securities obligations with their clients as per the Byelaws of the Exchange. Page | 21 . pay-in and pay-out of both funds and securities is completed on the same day. bank & Exchange trading holidays) after the pay-out of the funds and securities for the concerned settlement is completed by the Exchange. The transactions in 'F' group securities representing "Fixed Income Securities" and " G" group representing Govt. 2005. are settled only on a gross basis and the facility of netting of buy and sell transactions in such scrip’s is not available.f. Securities for retail investors are also settled at the Exchange on T+2 basis. In case of Rolling Settlements. All trades in this segment are done through BOLT system under S group.

The member-brokers are required to submit the pay-in instructions for funds and securities to banks and depositories Page | 22 .  Confirmation of 6A/7A data by the Custodians upto 11:00 a. and pay-out of funds and securities by 1:30 p. Downloading of final securities and funds obligation T+2 statements by members .  Downloading of provisional securities and funds obligation statements by memberbrokers.m.m.  Pay-in of funds and securities by 11:00 a.m.The following table summarizes the steps in the trading and settlement cycle for scrip’s under CRS  DAY ACTIVITY T  Trading on BOLT and daily downloading of statements showing details of transactions and margins at the end of each trading day.  6A/7A* entry by the member-brokers/ T+1 confirmation by the custodians.

In case Page | 23 . Thus.e..  Auction on BOLT at 11. the pay-in and pay-out of funds and securities takes places on the second business day (i. whichever is less.T+3 T+4 respectively by 10: 30 a.m. The settlement of the trades (money and securities) done by a memberbroker on his own account or on behalf of his individual. respectively.01% of the value of trades confirmed or Rs.m. on the next trading day is.m. The custodian can confirm the trades done by the members on-line and upto 11 a.. 10. Sundays and bank & Exchange trading holidays) of the day of the execution of the trade.m. however. The late confirmation of transactions by the custodian after 11:00 a.m. corporate or institutional clients may be either through the member-broker himself or through a SEBI registered custodian appointed by him/client. upto 12:15 p.000/-. * 6A/7A : A mechanism whereby the obligation of settling the transactions done by a member-broker on behalf of a client is passed on to a custodian based on confirmation of latter. permitted subject to payment of charges for late confirmation @ 0.m. excluding Saturday. on the next trading day.00 a.  Auction pay-in and pay-out of funds and securities by 12:00 noon and 1:30 p.

c. S and F and G group scrip’s after netting purchase and sale transactions in each scrip whereas Delivery and Receive Orders for “T”. B1. The Exchange generates Delivery and Receive Orders for transactions done by the members in A. Statements of securities and fund obligation. the custodians have been given connectivity to BOLT System and have also been admitted as clearing member of the Clearing House. Delivery/Receive orders for delivery /receipt of securities. d. Statements giving details of margins payable by the memberbrokers in respect of the trades executed by them. a. B2. “TS”. the liability for pay-in of funds or securities in respect of the same devolves on the concerned member-broker. Statements giving details of the daily transactions entered into by the members. In case a transaction done by a member-broker is not confirmed by a registered custodian within the time permitted. The following statements can be downloaded by the members in their back offices on a daily basis."C" & "Z" group scrip’s and scrip’s which are traded on the Exchange on Page | 24 . then the latter has to confirm the trade done by a member-broker on the BOLT System through 6A-7A entry. For this purpose. b.the delivery/payment in respect of a transaction executed by a memberbroker is to be given or taken by a registered custodian.

the funds obligations for the members are netted for transactions across all groups of securities. ‘S’.e. The Delivery/Receive Orders and Money Statement. "F". 'B2'. 'B1'. without netting of purchase and sell transactions in a scrip."trade to trade" basis are generated on gross basis. ‘T’.. "G" & 'Z' group of securities The trades done on BOLT/Exchange by the members in all the securities in CRS are now settled on the Exchange by payment of monies and delivery of securities on T+2 basis. Settlement Pay-in and Pay-out for 'A'. 'C'. All deliveries of securities are required to be routed through the Clearing House. i. as stated earlier. The Delivery Order/Receive Order provides information like the scrip and quantity of securities to be delivered/received by the members through the Clearing House. However. can be downloaded by the members in their back office. The Money Statement provides scrip wise/item wise details of payments/receipts of monies by the members in the settlement. Page | 25 . ‘TS’.

Demat pay-in : The members can effect pay-in of demat securities to the Clearing House through either of the Depositories i. For this..The Pay-in /Pay-out of funds based on the money statement and that of securities based on Delivery Order/ Receive Order issued by the Exchange are settled on T+2 day. quantity. then the value of shares delivered short is recovered from him at the standard/closing rate of the scrip’s on the trading day. The members are required to give instructions to their respective Depository Participants (DPs) specifying details such as settlement no. (CDSL). in such cases the Clearing Members are not required to give any delivery instructions from their accounts.e. (NSDL) or Central Depository Services (I) Ltd. etc. the National Securities Depository Ltd. In case. Thus. effective pay-in date. Page | 26 . the clients are required to mention the settlement details and clearing member ID through whom they have sold the securities. if a member-broker fails to deliver the securities. Members may also effect pay-in directly from the clients' beneficiary accounts through CDSL.

not available for delivery of non-pari passu shares and shares having multiple ISINs. on a floppy. If there is no discrepancy. etc. Pay-in of securities in physical form: In case of delivery of securities in physical form. a facility has been made available to the members of automatically generating Delivery instructions on their behalf from their CM Pool accounts maintained with NSDL and CM Principal Accounts maintained with CDSL. The members wishing to avail of this facility have to submit an authority letter to the Clearing House. Page | 27 . This facility is. The data submitted by the members on floppies is matched against the master file data on the Clearing House computer systems. then the securities are accepted. quantity.Auto delivery facility : Instead of issuing Delivery instructions for their securities delivery obligations in demat mode in various scrip’s in a settlement /auction. however. This auto delivery facility is available for CRS (Normal & Auction) and for trade to trade settlements. This auto delivery facility is currently available for Clearing Member (CM) Pool accounts and Principal accounts maintained by the members with the respective depositories .. scrip code. the members have to deliver the securities to the Clearing Hose in special closed pouches along with the relevant details like distinctive numbers.

. ICICI Bank.Funds Pay-in: The bank accounts of members maintained with the clearing banks. whose funds pay-in obligations are not cleared at the scheduled time.. viz. the same are credited by the Clearing House in the Pool/Principal Accounts of the member-brokers. Bank of India. is initiated as per penalty norms prescribed . HDFC Bank Ltd.. Oriental Bank of Commerce. Union Bank of India and Hongkong Shanghai Banking Corporation Ltd... Securities Pay-out: In case of demat securities. In case of those members. Standard Chartered Bank.. are directly debited through computerized posting for their funds settlement obligations. Centurion Bank Ltd. action such as levy of penalty and/or deactivation of BOLT TWSs. Indusind Bank Ltd. The Exchange has also provided a facility to the member-brokers for transfer of pay-out securities directly to the clients' beneficiary owner Page | 28 . UTI Bank Ltd.

CDSL & NSDL to credit the securities to the Beneficiary Owners (BO) Accounts of the clients. then the value of shares delivered short is recovered from him at the standard/closing rate of the scrips on the trading day.. the concerned member-brokers are required to give a client wise break up file which is uploaded by the member-brokers from their offices to the Clearing House. viz. Funds Payout: The bank accounts of the members having pay-out of funds are credited by the Clearing House with the Clearing Banks on the pay-in day itself In case. Based on the break up given by the member-brokers. For this. the Clearing House instructs depositories.accounts without routing the same through their Pool/Principal accounts in NSDL/ CDSL. the Receiving Members are required to collect the same from the Clearing House on the pay-out day. the Clearing House does an inter depository transfer to give effect to such transfers. In case of physical securities. if a member-broker fails to deliver the securities. In case delivery of securities received from one depository is to be credited to an account in the other depository. Page | 29 .

The CDSL acts as a depository for BSE. This conversion is done by NSDL and CDSL. It means to convert the electronically held shares back into physical form.Dematerialization of shares: Dematerialization as the name suggests. is a term used for conversion of shares from their physical form to electronic form. small lots and odd lots.  No stamp duty while transfer of shares. whereas the NSDL acts as a depository for NSE. Merits of dematerialization:  No risk of being fake or stolen shares. You have the Page | 30 .  Free from tedious paperwork as it was in the physical form.  Stock exchanges have now discarded the concept of marketable lots. Rematerialization: Rematerialization is the reverse of dematerialization. shares cease to exist in their physical form. After dematerialization.

Hence we can say that the open interest position at the end of each day represents the net increase or decrease in the number of contracts for that day. expired or full filled by delivery. “A” buys one contract of Nifty on Monday while “B” buys two on the same day. Say.complete freedom of conversion from electronic form to physical form whenever you want to do so. Open interest at the Page | 31 . for any day. for example. inclusive of both squared –off (closed) positions and new positions. that is. Thus. the trading volume will always be higher than the open interest. it is to be noted that open interest is not the same as trading volume. the number of future contracts or options contracts that have not been exercised. What is open interest? Every trade in the exchange would have an impact on the open interest for that day. Trading volume represents the total number of contracts that are traded during a day. However. OPEN INTEREST IN DERIVATIVE MARKET Open interest means the total number of open contracts on a security.

“B” buys another Nifty contract. if both parties to the trade initiate a new position. if one of the parties to the transaction squares off his position while the other creates one open interest will remain unchanged. mirrors the flow of money into the derivatives market. who are creating fresh long positions and suggests the flow of extra money into the market. RISING MARKET AND INCREASING OPEN INTEREST If the markets are on an uptrend and open interest is also increasing. it increases the open interest by one contract. The open interest at the end of the day is now four. It implies the entry of new players into the market. Here is how you interpret open interest.end of the day will be three. it it’s a bullish signal. while “A” sells his one contract to “C”. Page | 32 . Open interest will decrease by the same number of contracts. But if the traders square off their existing positions. On Tuesday. which makes it a vital indicator of market direction. Open interest. However. thus. In other words.

Page | 33 .off of long – positions by traders. Thus.RISING MARKET AND DECREASING OPEN INTEREST If despite a rise in market. represents a trend reversal. FALLING MARKET AND INCREASING OPEN INTEREST When open interest records an increase in value amidst falling market. the open interest decreases. given that open interest is decreasing. a declining open interest can be considered a signal indicating the strengthening of the market. This also implies that money is flowing out of the market. Though a rise in open interest means that new money is probably being used for creating fresh short positions. it could be a bearish signal. it can be attributed to the forced squaring. It. FALLING MARKET AND DECREASING OPEN INTEREST If open interest decreases in a falling market. which will lead to a further downtrend. since the downtrend in the market is likely to reverse after the long positions have been squared off. it can be interpreted as a precursor to a trend reversal. thus. in a falling market. The lack of additions to open interest shows that the markets are rising on the back of shortsellers covering their existing positions.

More specifically.SIDEWAYS MARKET AND INCRESING OPEN INTEREST If the open interest decreases in a sideways market. it is only an indicator that helps us trade intelligently it cannot be considered foolproof. Though open interest is a good barometer of where the markets are heading. THE INDEX NUMBER An index is a number which measures the change in a set of values over a period of time. A decrease in open interest only represents the squaring-off of old positions and lack of any new positions might result in a sideways or weak trends in the market. A stock index represents the change in value of a set of stocks which constitute the index. we can say that flat market trends will continue for some more time. It is a relative value to the weighted average of prices at some arbitrarily chosen Page | 34 . a stock index number is the current relative value of a weighted average of the prices of a pre-defined group of equities.

A good stock market index is on which captures the behavior of the overall equity market. A market index is very important for its use  As a barometer for market behavior. It should represent the market. the investor’s confidence.  As a benchmark portfolio performance.  As an underlying in derivative instruments like index futures.  In passive fund management by index funds  Also acts a barometer for lot of elements such as liquidity in the market. for example the base value of the Nifty was set to 1000 on the start date of November 3.starting date or base period. it should be well diversified and yet highly liquid. 1994. Movements of the index should represent the returns obtained by “typical” portfolios in the country. the growth of the economy. DESIRABLE ATTRIBUTE OF AN INDEX A good market index should have the following attributes: Page | 35 . The starting value or base of the index is usually set to a number such as 100 or 1000. government policies etc.

Including Liquid Stocks Page | 36 . the more serious problem lies in the stocks that are included in the index when it is diversified.  It should be professionally maintained. However there is diminishing returns form diversification. its inclusion in index results in an index. which reflects. which actually worsen the index. delayed or stale price behavior rather than current price behavior of the market. We end up including illiquid stocks. It should capture the behavior of a large variety of different portfolios in the market. there is very little gain by diversifying beyond a point. This is achieved by diversification in such a manner that a portfolio is not vulnerable to any individual stock or industry risk. Capturing Behavior Of Portfolios A good market index should accurately reflect the behavior of the overall market as well as of different portfolios.  The stocks included in the index should be highly liquid. Since an illiquid stock does not reflect the current price behavior of the market. A well diversified index is more representative of the market.

it is about ability to transact at a price. and brought inline with the current state of market. It is crucial that such changes are made at a steady pace. This necessarily means that the same set of stocks would not satisfy these criteria at all times.120. to meet the application needs of users. It reflects the costs faced when actually trading an index.05 and sell at around Rs. a liquid stock has very tight bid ask spread.Liquidity is much more than trading frequency. For example. a good index methodology must therefore incorporate a steady pace of change in the index set. It is very healthy to make a few changes every year. when the market price is ruling at Rs. For a stock to qualify for possible inclusion into the index. it has to have market impact cost of below 0.119. each of which is small and does not dramatically alter the character of the index. on a regular basis. a stock is considered liquid if one can buy some shares at around Rs. a time series of the index sold be available.95. Maintaining Professionally It is now clear that an index should contain as many stocks with as little impact cost as possible. which is very close to the current market price.75% when doing Nifty trades of half a crores Page | 37 .120. the index set should be reviewed. Impact cost Market impact cost is a measure of the liquidity of the market.

but can generate very large losses. This is different form futures. There is no possibility of the options position generating any further losses to him. which is free to enter into. The market impact cost on a trade of Rs. He pays for the options in full at the time it is purchased. and to mutual funds creating “guaranteed return products”.05%. a buy order goes through at 4002. At practical level.e. 4000+ (4000*0.0005) FUTURES AND OPTIONS An option is different form futures in several ways. After this.e. Buying put options is buying insurance. 4000-(4000*0. who cannot put in the time to closely monitor their futures positions. he only has an upside.0005) and a sell order gets 3998 i. the option buyer faces an interesting situation. i. To buy a put option on Nifty is to buy insurance which reimburses the full extent to which Nifty drops below the strike price of the put option.rupees.3 million of the full Nifty works out to be about 0. This is attractive to many people. Page | 38 . This characteristic makes options attractive to many occasional market participants. This means that if Nifty is at 4000.

Buying security involves putting up all the money upfront. the holder becomes a part owner of the company. a customer must open a security trading account with a securities broker and a demat account with a securities depository. The shareholder typically receives the rights and privileges associated with the security. NSE ranks first in the world in terms of number of contracts traded in single stock futures. One of the reasons for the success could be the ease of trading and settling these contracts. To trade securities.TRADING UNDERLYING VERSUS TRADING SINGLE STOCK FUTURES The single stock futures market in India has been a great success story across the world. which may include the Page | 39 . With the purchase of shares of a company.

short sales on security can only be executed on an up tick. The trading in index options commenced on June 4. the holder essentially makes a legally binding promise or obligation to buy the underlying security at some point in the future.receipt of dividends. Selling securities involves buying the security before selling it. Buying futures simply involves putting in the margin money. Security futures do not represent ownership in a corporation and the holder is therefore not regarded as a shareholder. invitation to the annual shareholders meeting and the power to vote. 2001 and trading in options on individual securities commenced on July 2. To trade futures. it is assumed that the securities broker owns the security and then “lends” it to the trader so that he can sell it. Single stock futures were Page | 40 . They enable the futures traders to take a position in the underlying security without having to open an account with a securities broker. With the purchase of futures on a security. Even in cases where short selling is permitted. a customer must open a futures trading account with a derivatives broker. 2000. besides. even if permitted. 2001. DERIVATIVE MARKET AT NSE The derivatives trading on the NSE commenced with S&P CNX Nifty Index futures on June 12.

2001.based products like index derivatives and index funds. Currently. A new contract is introduced on the next trading day following the expiry of the near month contract. with 1 month. 2008 while the long term option contracts on S&P CNX Nifty were introduced for trading on March 3 2008 NSE is the largest derivatives exchange in India. The most popular index derivatives contract the world over is index futures and index options. INDEX DERIVATIVES Index derivatives are derivative contracts which have the index as the underlying. Three contracts are available for trading. both in terms of volume and turnover. the S&P CNX Nifty was scientifically designed to enable the launch of index. NSE’s market index. the derivatives contracts have a maximum of 3-month expiration cycles. CNX IT and BANK Nifty contracts. The mini derivative Futures & Options contract on S&P CNX Nifty was introduced for trading on January 1. This was followed by Nifty options and thereafter by sectoral indexes. The first derivative contract to be traded on NSE’s market was the index futures contract with the Nifty as the underlying. Page | 41 . Today.launched on November9. 2 months and 3 months expiry.

For instance. the contract size on NSE’s futures market is 200 Nifties. at the end of which it will cease to exist. CONTRACT SIZE: The amount of asset that has to be delivered under one contract. two months and three months expiry cycles which expire on the last Thursday of the month. Page | 42 . CONTRACT CYCLE: The period over which a contract trades. EXPIRY DATE: It is the date specified in the futures contract. The index futures contracts on the NSE have one month. Thus a January expiration contract expires on the last Thursday of January.FUTURES TERMINOLOGY SPOT PRICE: The price at which an asset trades in the spot market FUTURES PRICE: The price at which the futures contract trades in the futures market. This is the last day on which the contract will be traded.

BASIS: In the context of financial futures. there will be a different basis for each delivery month for each contract. the margin account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price. basis will be positive. COST OF CARRY: the relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This is called Marking-to-market. MAINTENANCE MARGIN: This is somewhat lower than the initial margin. at the end of each trading day. this reflects that futures prices normally exceed spot prices. In a normal market. Page | 43 . If the balance in the margin account falls below the maintenance margin. This measures the storage cost plus the interest that is paid to finance the asset less the income earned on the asset. MARKET TO MARKET: in the futures market. the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day. INITIAL MARGIN: the amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. basis can be defined as the futures price minus the spot price. This is set to ensure that the balance in the margin account never becomes negative.

something which is neither cheaper nor convenient whereas one can go long or short on the futures depending on his short term view of the markets. An Indian futures settlement currently takes place on the last Thursday of every month. he has to shift his position to the next month’s future. we pay the full value of the transaction (i. We cannot short sell unless we borrow the stock. So the current month’s futures expire on the month’s last Thursday. Page | 44 .  One can only go long in the spot market. a person can buy any stock in the multiple of one unit where as a futures contract is the smallest unit which one can trade in the futures market.e. i. If a trader has to carry his position to the next month. they are dated. the number of shares multiplied by market price of each share) whereas in futures we pay only the margin which is a fraction of the total transaction value.A futures contract is different from the underlying stock in the following ways:  When we buy a stock.  There is no time limit of settlement in cash market but in case of futures contracts.e.  The cash market has a lot of none.

709 Stock options 0 0 4.43.430 Stock futures 0 0 16.987 Page | 45 .939 Index options 0 195 389 1.63.942 8.950 4.096 2.133 57.473 16.178 21.314 3. There is no way of taking a position on the index through the cash market whereas futures facilitate trading of index futures. A futures contract price is the sum of cash price and the monthly cost of carry.306 21.348 64. The cost of carry should always be positive because a futures trade is really a carried forward product similar to the erstwhile badla.40.218 2.042 7.505 78. But just as badla rates sometimes become negative when the market sentiment is bearish. the cost of carry can also similarly be negative when the sentiment is poor.572 2.crore) Mont h Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Index futures 35 590 2.75.424 14.77.392 1.799 11. Business growth of futures and options market: Turnover (Rs.797 3.08.969 92.503 3.017 77.642 15.123 9.

750 crores for the last 6 months.  Daily Average Trading value should not be less than 5 crores in last 6 months  It must be traded least 90% of Trading days in last 6 months.Source: NCFM Derivative Module Work Book ELIGIBILITY FOR ANY STOCK TO ENTER IN DERIVATIVE MARKET  Non promoter holding (free float capitalization) should not be less than Rs.  Non Promoter Holding must at least be 30%  BETA should not be more than 4 (for previous 6 months) TRADING MECHANISM The futures and options trading system of NSE. called NEATF&O trading system. provides a fully automated screen-based trading for Nifty futures & options and stock futures & options on a nation Page | 46 .

A total of 216. Additionally. 7. they can enter and set limits to positions. etc. The clearing members use the trader workstation for the purpose of monitoring the trading members for whom they clear the trades. Page | 47 . i. which a trading member can take.573 contracts with a total turnover of Rs. It supports an anonymous order driven market which provides complete transparency of trading operations and operates on strict price-time priority. various conditions like Immediate or Cancel. The average daily turnover at NSE now exceeds Rs. VOLUMES The trading volumes on NSE’s derivatives market have seen a steady increase since the launch of the first derivatives contract. Limit/Market price. order matching. order and trade management.271 crores were traded during 20062007.356.e. index futures in June 2000.883.35000 crores. Stop loss. It is similar to that of trading of equities in the cash market segment. It provides tremendous flexibility to users in terms of kinds of orders that can be placed on the system. The NEAT-F&O trading system is accessed by two types of users.wide basis and an online monitoring and surveillance mechanism. can be built into an order. The trading members have access to functions such as order entry.

Pricing the Futures A futures price can be simply derived by applying the cost of carry logic. Every time the observed price deviates form the fair value. arbitragers would enter into trades to capture the arbitrage profit. Hedging using index derivatives has become a central part of risk management in the modern economy. This in turn would push the futures price back to its fair value. by which the fair value of a futures contract can be determined.INDEX DERIVATIVES FOR HEDGING To understand the use and functioning of the index derivatives markets. By looking at an index. Index derivatives allow people to cheaply alter their risk exposure to an index (hedging) and to implement forecasts about index movements (speculation). The cost of carry model used for pricing futures is as follows: F=SerT Where: Page | 48 . we know how the market is faring. it is necessary to understand the underlying index.

a.71828 Example: Security XYZ ltd trades in the spot market at Rs. 1150. Money can be invested at 11% p. This margin is must to every trading member.r= cost of financing continuously compounded interest rate T= Time till expiration in years e= 2.11*1/12 =1160 INITIAL MARGIN  At the inception of a contract every client is required to pay initial margin. The fair value of a one month futures contract on XYZ is calculated as follows: F = SerT =1150*e0.  Initial margins are charged on Trade by Trade basis Page | 49 .

When the delivery period is reached.5% CONVERGENCE OF FUTURES PRICE TO SPOT PRICE As the delivery month of a futures contract is approached. Initial margins are charged by NSCCL  Initial margins are charged for the purpose of recovery and safe guard against the fluctuation in the market. the futures price equals or is very close to the spot price.  A future value is calculated on cost of carry model. To see why this so. the futures price converges to the spot price of the underlying asset. we first suppose that the futures price is above the spot price during the delivery period. INITIAL MARGINS CHARGED ON F&O MARKET Index futures: 5% Index options: 3% Stock options: 7. Traders then have a clear arbitrage opportunity:  Short a futures contract  Buy the asset Page | 50 .

The result is that the futures price is very close to the spot price during the delivery period. the futures price will tend to rise. Suppose next that the futures price is below the spot price during the delivery period. As they do so. The convergence of the futures price to the spot price when future price is above the spot price can be pictorially represented as follow: Page | 51 . the futures price will fall. Companies interested in acquiring the asset will find it attractive to enter into a long futures contract and then wait for delivery to be made. Make the delivery These steps are certain to lead to a profit equal to the amount by which the futures price exceeds the spot price. As traders exploit this arbitrage opportunity.

Figure: A The convergence of the futures price to the spot price when future price is below the spot price can be pictorially represented as follows: Figure: B Page | 52 .

 TM (Trading Member) are responsible to collect and settle the daily MTM margins for pay in/ pay out of their clients according to the clients open position.  For calculating MTM margin future last ½ hour average price is takes.  CM (clearing member) is responsible to collect and settle the daily MTM Margins (Profits/loss) from their trading members according to their open positions. if it is not traded on that day or last half hour MTM is calculated on theoretical price model. OPEN INTEREST CALCULATION Page | 53 .MARK TO MARKET (MTM) MARGINS  MTM margins is charged on continuous Basis t the end of each day on Daily basis of cumulative net out standing open position.  MTM margin balance at he year end shown in current asset account.

200(total sell) = 200 long net position 200(total buy) .Open interest means out standing orders of (long position + short position) Contracts in a particular point of time.400(total sell) = 200 short net position 500(total buy) . OPEN INTEREST CALCULATION (EXAMPLE) 200(Total buy)-400(total sell) = 200 short (net position) Client Open Position Client A Client B Client C 400(Total buy) .400(total sell) = 100 long net position = 500 long + short Trading Member Total Open Position = 700 long+ short Clearing member open position: All trading member open position and custodial participants open positions Page | 54 .

For every buyer of an option there must be a seller. or before. There are two options which can be exercised:  Call option. As with futures. As with futures. that gives one party (the option holder) the right. the right to sell is referred as a put option.  Put option. or a provision of a contract. options are brought into existence by being traded. if none is traded. The seller is often referred to a s the writer. none exists. to perform a specified transaction with another party (the option issuer or option writer) according at specified terms.arranged price on. The owner of a property might sell another party an option to purchase the property any time during the next three months at a specified price. a particular date. diminishing the total number. the process of closing out options positions will cause contracts to cease to exist. Thus an option is the right to buy or sell a specified amount of a financial instrument at a pre. there is no limit to the number of option contracts that can be in existence at any time.OPTIONS An option is a contract. conversely. Page | 55 . but not the obligation. a right to buy is referred to as a call option.

OPTION TERMINOLOGY INDEX OPTIONS: these options have the index as the underlying. which is known as the expiry date. European style options can be exercised only on the maturity date of the option. Both type of the option are traded through out the world STOCK OPTIONS: Stock options are options on individual stocks. An American style option can be exercised at any time up to. Page | 56 . BUYER OF AN OPTION: the buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his options on the seller/writer. Some options are European while others are American. and including. A contract gives the holder the right to buy or sell shares at the specified price. the expiry date. It is to be noted that the distinction has nothing to do with geography.

AT THE MONEY OPTION: An at the money option is an option that would lead to zero cash flow if it were exercised immediately. spot price = strike price). the put is ITM if the index is below the strike price. A call option on the index is said to be in-the-money (ITM) when the current index stands at a level higher than the strike price (i. IN THE MONEY OPTION: An in the money option is an option that would lead to a positive cash flow to the holder if it were exercised immediately. An option on the index is at the money when the current index equals the strike price(i. the call is said to be deep ITM.WRITER OF AN OPTION: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercised on him. STRIKE PRICE: the price specified in the options contract is known as the strike price or the exercise price.e.e. OUT OF THE MONEY OPTION: An out of the money (OTM) option is an option that would lead to a negative cash flow if it were Page | 57 . spot price> strike price).. In the case of a put. If the index is much higher than the strike price.

The intrinsic value of a call is the amount the option is ITM. the put is OTM if the index is above the strike price. but all the complex strategies are based on the Page | 58 . Usually. the call is said to be deep OTM.exercised immediately. or else equal. If the index is much lower than the strike price.intrinsic value and time value. STRATEGIES IN FUTURES AND OPTIONS The following are the four basic strategies in options market which can be further designed in combination of one or more of the basic strategies. In the case of a put. TIME VALUE OF AN OPTION: The time value of an option is the difference between its premium and its intrinsic value.e. if it is ITM. If the call is OTM. the maximum time value exists when the option is ATM. the greater is an option’s time value. A call option on the index is out of the money when the current index stands at a level which is less than the strike price(i. an option should have no time value. The longer the time to expiration. spot price < strike price). its intrinsic value is zero. INTRINSIC VALUE OF AN OPTION: The option premium can be broken down into two components. At expiration.

following 4 basic kind of strategies.500. a call can be taken upto a duration of 3 months form now. at a premium of Rs. The following is the tabulation of the payoffs at expiration.500. We can consider the live example of taking a call option of GMR Infrastructure at a strike price of Rs. 25 on 01-06-2009. STOCK PRICE ON GROSS PAYOFF ON NET PAYOFF ON EXPIRY OPTION OPTION Page | 59 . Here we have taken a call at the strike price of Rs. so the understanding of these 4 strategies is very essential before we go any further: BUYING A CALL OPTION A buyer of the option paying a premium (price) for the option to buy a specified quantity at a specified price any time prior to the maturity of the option.

400 450 500 550 600 650 700 750 Table: A 0 0 0 50 100 150 200 250 -25 -25 -25 25 75 125 175 225 The following is the graphical representation of the above strategy: CALL OPTION PAYOFF 300 250 200 PAYOFF 150 100 50 0 -50 400 450 500 550 600 650 700 750 PRICE GROSS PAYOFF NET PAYOFF Figure: C In the above example when GMR falls to a price of Rs.400 Page | 60 .400. the buyer of the option can purchase the share form the market at Rs.

In the above diagram we can notice that the payoffs are one to one after the price of the underlying security rises above the exercise price. results in a profit for the buyer of the option. However.75 104. the option is referred to as out of the money. The above strategy was applied in the month of June The following are the updates DATE 01-06-2009 15-06-2009 21-06-2009 STRIKE PRICE 500 500 500 OPEN 27 54 99 HIGH 27 64. When the security price is less than the exercise price.750 then the holder of the option has the right to purchase that share at a price of Rs.25000.e.500 form the seller of the option. In this case any price level above Rs.25 because no matter if the share price fall below Rs.45 99 Page | 61 . Investment in the above option is Rs. Form the above figure it can be seen that the investor who is already long i. which is the breakeven point.with out exercising the right to buy the stock at Rs. But suppose that the share prices rise to Rs.500 the investor is not holding any stock.25 as the premium being paid for the option remaining unexercised. on that he incurs a loss of Rs.50 LOW 23 52.500. holds a stock bears a loss only to the extent of Rs.525 (500+25). Once the investor is either long or short the stock he can adopt any of these strategies to hedge his risk.25*1000=Rs.

9 14.4.25000 only.10 on 04-06-2009.10.250. The pay off form a put can be illustrated.90 As it can be seen from the above table that the call option price of the stock has given a fantastic return of over 900% on investment of Rs.25000 BUYING A PUT The second strategy is the put strategy where the buyer of the put option has to pay a premium(price) for the option to sell a specified quantity at a specified price any time prior to the maturity of the option. Here we take the example of buying a put option on the stock of AIR DECCAN.90 249 200. Here the risk of the above investment was limited only to Rs.140.27-06-2009 Table: B 500 200. PRICE 110 120 130 GROSS PAYOFF 30 20 10 NET PAYOFF 24.9 Page | 62 .4. investment in the above strategy is Rs.10*2500=Rs.9 4. The exercise price was Rs. The premium paid on the above option was Rs. Notice that the payoffs are one to one when the price of the security is less than the exercise price.

90 6.75 6.1 -4.90 6.140 150 160 170 Table: C 0 0 0 0 -4.00 4.1 -4.40 4.40 4.00 8.40 4.1 -4.75 LOW 4.1 Following are the update of the above option DATE 04-06-2009 07-06-2009 08-06-2009 27-06-2009 Table: D STRIKE PRICE 140 140 140 140 OPEN 4.00 4.75 The following is the graphical representation of the above strategy: Page | 63 .75 HIGH 4.

In the above diagram we can notice how the down side risk is minimized if the stock is volatile and the share prices may fall. Here an investor will get profits only if the stock falls below Rs. the value of the put on a per share basis will be the larger of the exercise price minus the stock price or zero.9 In this option the investor has gained 64. WRITING THE CALL OPTIONS Page | 64 .134.PUT OPTION PAYOFF 35 30 25 20 15 10 5 0 -5 -10 PAYOFF GROSS PAYOFF NET PAYOFF 110 120 130 140 150 PRICE 160 170 Figure: D A put option is a contact giving its owner the right to sell a fixed amount of a specified underlying asset at a price at any time on or before a fixed date.6% with in a month. On the expiration date.

5. Higher the spot price more is the loss he makes. Whatever is the buyer’s profit is the seller’s loss. if upon expiration the spot price of the underlying is less than the strike price. the writer of the option charges a premium.5 -11.8. the spot price exceeds the strike price. The profit/loss that the buyer makes on the option depends on the spot price of the underlying.5 -21.5 8. As the options are always costly at the beginning of the month we have written a call option on CAIRN INDIA LIMITED ON 1st of June at a strike price of Rs. Following is the payoff chart for the above option: PRICE 110 120 130 140 150 160 170 GROSS PAYOFF 0 0 0 0 -10 -20 -30 NET PAYOFF 8. the buyer will exercise the option on the writer. Hence as the spot price increases the writer of the option starts making losses.A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option. For selling the option.5 -1.5 Page | 65 . the buyer lets his option expire unexercised and the writer gets to keep the premium. If upon expiration.5 8.5 8.140 with a premium of Rs.

4 4.00 140 140 OPEN 8.5 2.35 4. 150 Page | 66 .5 4.1 2.30 HIGH 8.00 140.5 2.90 LOW 8.Table: E Following are the updates of the option rates in the market: DATE 01-Jun-2009 12-Jun-2009 20-Jun-2009 28-Jun-2009 Table: F STRIKE PRICE 140.2 4.2 The following is the graphical representation of the above strategy: CALL WRITTING PAYOFF CHART 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 PAYOFF GROSS PAYOFF NET PAYOFF 110 120 130 140 150 PRICE 160 170 Figure: E From the above we can notice that the liability is potentially unlimited when a investor are writing options.85 4.35 4.

9375 Following is the payoff chart of writing the put option PRICE 650 GROSS PAYOFF -150 NET PAYOFF -125 Page | 67 . the writer of the option charges a premium.10. The net return on this option at the expiry period was Rs. Whatever is the buyer’s profit is the seller’s loss. the buyer lets his option expire un-exercised and the writer gets to keep the premium.624. the profit/loss that the buyer makes on the option depends on the spot price of the underlying. If upon the expiration the spot price of the underlying is more than the strike price. If upon expiration. the buyer will exercise the option on the writer. WRITING OF PUT OPTIONS A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option.Here we can see that the investment in this option is nil. The put writer will first get a premium of amount Rs. For selling the option. the spot price of the underlying happens to be below the strike price. as the call writer will get the premium at which he is writing.

We can clearly see from these diagrams that the Page | 68 . the upside is limited to the premium of the option (the initial price).700 750 800 850 900 Table: G -100 -50 0 0 0 -75 -25 25 25 25 The following is the graphical representation of the above strategy: WRITING PUT OPTION PAYOFF 50 0 PAYOFF -50 -100 -150 -200 650 700 750 800 PRICE 850 900 GROSS PAYOFF NET PAYOFF Figure: F As with the written call. The downside is limited to the minimum asset price-which is zero.

8. depending upon his risk appetite and the outlook about the market conditions.investor.5 FIRDAY MARKET ANALYSIS DATE 06-Mar 13-Mar 20-Mar 27-Mar 17-Apr 24-Apr 08-May 15-May 22-May 29-May 1 8198 8344 9002 10003 10947 11135 12117 11872 13736 14296 2 8104 8481 8951 1003 7 1106 8 1115 0 1209 2 1194 9 1366 3 1432 0 3 8348 8793 9000 1012 8 1134 0 1136 3 1218 1 1221 9 1393 7 1472 7 4 8047 8481 8867 9913 1094 6 1107 0 1176 5 1194 9 1361 1 1432 0 5 8326 8757 8967 1004 8 1102 3 1132 9 1187 6 1217 2 1388 7 1462 5 DIFFERENCE 128 413 -35 45 76 194 -241 300 151 329 PRE'S 1 CLOSED 2 Open 3 HIGH Page | 69 . 212. can minimize his losses. The net return on this option at the expiry period was Rs.

4 5 LOW CLOSING Page | 70 .

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Conclusions according to my study Volatile markets are characterized by wide price fluctuations and heavy trading. stock broker says Monday as black monday  Page | 75 .   Inverters get time to pay money ie clearing of cheque will be on monday. Settlement day or closing day of week. In my study its says that to invest on Thursday and withdraw on firday .

Most of investors are trading not only in derivatives for hedging. but also for other purposes. 3) Page | 76 .CONCLUSIONS 1) Derivatives in equity specially are more suited to provide for hedging and more cost effective. 2) As the stock Index Futures and Options are available. It has less risky and more profitable. the FII’s buying /selling operations can be performed at greater speed and less cost and without adding too much to market volatility.

Treasury managers and portfolio managers can hedge all risks without going through the tedious process of hedging each day and amount/share separately. 8) Derivatives are not only desirable but also necessary to hedge the complex exposure and volatility that the financial companies generally face in the capital markets today. Page | 77 . it is also possible for companies to get out of positions in case that market reacts otherwise. They simply manipulate risks and transfer them to those who are willing to bear these risks. 9) All derivative products are low cost products. which may be share currency etc. with a low margin requirement. This also does not involve much cost. 5) Hedging through derivatives reduces the risk of owning a specified asset. 6) All derivative instruments are very simple to operate. Companies can hedge a substantial portion of their balance sheet exposure.4) Derivatives do not create any new risk. Just as derivatives can be contracted easily. 7) Derivatives also offer high liquidity.

There is no short cut formula which could be applied instantly and make money out of it instantly in the stock market. Indian capital market and stock market may offer some of the best and lucrative opportunities to make big money as compared to other investment avenues. patience. Therefore. a good investment takes time. hard work and perseverance to achieve success.There is no assured route for success. This is a fact which is universally applicable and so in case of investment. Page | 78 . Over the next ten – twenty years.

4. due to its complex nature an investor fails to understand the risk reward of a particular strategy. 2. as application of appropriate strategy at appropriate situation will results into profitable transactions An investor must also be suggested to write certain derivative exams conducted by leading financial organization in the country for proper understanding of the derivative market. There is a need to educate the investor in futures and options market. . which may result into losses for the investor.SUGGESTIONS 1. The research reports must be made more explanatory which must show the risk covered in a particular strategy and the return Page | 79 3. An investor must also be thought as to which strategy must be applied at what situation.

Anand Rathi Securities can conduct certain investor education camps in collaboration with leading media channels. A formal mechanism should be established for co-ordination between SEBI and RBI in respect of all financial derivatives 8. it must be accompanied by payoff chart along with the line graph of the strategy suggested. 7. which will serve both the purpose which are brand advertisement and investor awareness. As of now it’s limited to BSE and NSE. Tight supervision is essential for successful derivative trading. There is a need to start derivative trading at all stock exchanges in all over India. SEBI has to implement more powerful rules and regulations and implement certain measures for taking strict action against all illegal transactions. Administrative machinery of existing stock exchanges should be strengthened wherever necessary. 5. 6. Page | 80 . 9.which the investor can expect.


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