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INDIAN INSTITUTE OF PLANNING AND MANAGEMENT

CHENNAI

THESIS
ON
“FORMULATING THE USE OF DERIVATIVES STRATEGIES
IN
EQUITY MARKET”

SUBMITTED BY
REUBEN DAVIS .J
UNDER THE GUIDANCE OF MR. BHASKAR REDDY
FINANCE
BATCH - PGP/FW/05-07
ALUMNI ID – FW/FIN/00423

ABSTRACT
Financial markets are extremely volatile and hence the risk factor is an important concern
for financial agents. To eliminate this risk, the concept of derivatives comes into the
picture. During 2005 month of may stock market saw an historic crash, and investors lost
heavily because most of these investors did not hedge their risks by using equity
derivatives. And which strategies to use in growing, static, declining market.
Given the importance of derivatives in an emerging market like India it is no wonder that
share broking firms are investing heavily in building up infrastructure and mining up
cliental base to increase market share. The latest trend in the market shows retail
investors are responding in line with the institutional investors which requires efficient
traders to make them understand about the F&O strategies. Indian stock market is also act
in line with performance of the overseas markets; recent market trend clearly gives an
indication, where proper derivative strategies could have saved investors from huge
losses. Now as the market is showing a growth trend there is an ample opportunity to the
investors to take proper strategies to play in the market and adhere to the popular saying
BE FEARFUL WHEN OTHERS ARE GREEDY, AND BE GREEDY WHEN OTHERS
ARE FEARFUL ie take proper hedging positions even when the market is in uptrend,
Hence Equity derivatives are very important for a volatile market like in India,
As Nowadays traders are aware of these popular strategies but they are not aware of
which situations to apply these derivatives strategies in the market
The market methodology followed is primary data collected from a channel of network
that involves independent
- Large retailers, Financial institutions, Banks, HNI’s, Fund houses, Brokers who use
these derivative strategies or use them on behalf of their clients.
- Also dealing room operations.The dealings of the firm with its client investors will
properly observed and studied in detail.
-

Questionnaire survey.

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And secondary data from a host of book materials, and Derivatives materials
The expected outcomes from the thesis is to understand and apply how to use the concept
of equity strategies and under what market conditions these should be used. Equity
market strategies and try to beat the market by hedging positions and implies the use of
all the popular equity derivatives strategies with practical examples

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THE INDIAN INSTITUTE OF PLANNING AND MANAGEMENT CHENNAI CERTIFICATE This is to certify that the Thesis entitled “Formulating the use of Derivatives strategies in Equity Market” is the original work and has been successfully carried out by Reuben Davis. BHASKAR REDDY (External Guide) 4 4 . Date: Prof.J in partial fulfillment of Post Graduate Diploma in Management under my guidance during the academic year 05-07.

He helped me at each and every stage of this project. Reuben Davis. Next I would like to thank all the respondents and all my colleagues at Motilal Oswal Financial services who gave their valuable time and their insights on the research topic without which it would be impossible. Last but not the least want to thank God whose grace and mercy was with me throughout this thesis preparation.Krishnan for approving this topic and guiding me throughout the project.ACKNOWLEDGEMENTS This Thesis has given me immense insights about the practical aspect of Derivative strategies and it’s working. Then I would like to thank my external guide Mr. This project also helped me to improve my report making skills and the true understanding of derivatives Foremost I would like to thank my internal guide Prof R. Bhaskar Reddy without whom this project wouldn’t be a success. I got to learn a lot about the derivatives trading and the way they handle their clients and projects.J 5 5 .

Once you send me the id number. Furthermore. you are required to send me at least 6 Thesis Guidance Response Sheets every time you interact with your Guide during the course of the Thesis. R. Please go ahead with the thesis. Sekar ( r. Regards. This letter is a formal approval to the topic proposed by you “Formulation of strategies in the use of Derivatives in equity market”.THESIS TOPIC APPROVAL (FIN) FW / 05-07 Dear Reuben. Remember to register yourself at the IIPM-Chennai Library with Mr.edu ) and send me the id number for my records.sekar@iipm. I have received your synopsis as well as the confirmation that Prof. Krishnan 6 6 . I shall email the thesis response sheet to you. Bhasker Reddy would guide you through the thesis.

1 1.3 1.78 79 – 84 85 .2 1.NO 1 1.53 54 .3 7.73 74 .2 7.75 76 77 .TABLE OF CONTENTS SR.88 89 .90 7 .10 11 .5 2 2.1 7.1 2.2 3 4 5 6 7 7.4 PARTICULARS INTRODUCTORY ITEMS Abstract Signatory Page Acknowledgement Topic Approval Letter Table of Contents CONTENTS Introduction Literature Review RESEARCH METHODOLOGY RESEARCH ANALYSIS RECOMMENDATION CONCLUSION ANNEXURE Thesis Synopsis Response Sheets Questionnaire Bibliography 7 PAGE NO.70 71 .4 1.50 51 . 2-8 2 4 5 6 7 8 .

2.1 INTRODUCTION 8 8 .

They increase savings and investment in the long run period 9 9 . They increase the volume traded in markets because of participation of risk averse people in greater numbers 5. The index futures and options contract on NSE are based on S&P CNX. SEBI permitted the derivative segments of two stock exchanges. They give rise to entrepreneurial activity 4.INTRODUCTION Stock markets extremely risky and volatile and hence the risk consideration is an important concern for investors. The trading in BSE Sensex options commenced on June 4. the concept of derivatives comes into the picture. NSE and BSE. Derivatives trading commenced in India in June 2000. They help in the discovery of future as well as current prices 3. and their clearing house/corporation to commence trading and settlement in derivatives contracts. To reduce this risk. Futures contracts on individual stocks were launched in November 2001. The derivatives market performs a number of functions: 1. 2001. Single stock futures were launched on November 9. 2001 and the trading in options on individual securities commenced in July 2001. They help in transferring risks from risk averse people to risk oriented people 2. at present Mutual Funds are permitted to participate in the derivatives market for the purpose of hedging (minimizing risk) and rebalancing their portfolio.

The market methodology followed is primary data collected from a channel of network that involves independent - Large retailers. . Fund houses.The dealings of the firm with its client investors will properly observed and studied in detail. HNI’s. And secondary data from a host of book materials. Brokers who use these derivative strategies or use them on behalf of their clients. Financial institutions. and Derivatives materials The expected outcomes from the thesis is to understand and apply how to use the concept of equity strategies and under what market conditions one should use these Equity market strategies and try to beat the market by hedging our holdings and implies the use of all the popular equity derivatives strategies with practical examples 1 10 . Banks. - Questionnaire survey.Also dealing room operations.

2 LITERATURE REVIEW 1 11 .2.

or indices (such as a stock market index like Nifty and Sensex). Even the value of mutual fund units changes on a day to day basis. exchange rates. American depository receipts/global depository receipts of ICICI. The price of curd depends upon the price of milk which in turn depends upon the demand and supply of milk. if bought in cash market full amount need to be paid . interest rates. See it this way. Every time futures contract is bought a fixed margin which is calculated per stock basis and trade on that margin basis is needed to be paid to buy Infosys in lot sizes ie 200 or 300 lot size per stock.But if bought in futures it can be played on just the margin amount and take advantage of market movements if the Infosys stock falls then the long futures position loses But if the Infosys stock rises then the Infosys position gains 1 12 . And the price of Cipla warrants depends upon the price of Cipla shares.LITERATURE REVIEW Meaning of Derivatives: A Derivative are types of investments whose performance are amplified from the performance of assets (such as commodities. The diverse range of underlying assets and payoff alternatives leads to a huge range of derivatives contracts available to be traded in the financial market. these examples prove that derivatives are not so new to us. This performance can determine both the amount of the payoffs. The main types of Equity derivatives are futures and options A very simple example of derivatives is curd. Equity Futures : Contracts which a investor or trader can buy to take advantage of the market and protect against unwanted price movements ie buy hedging his portfolio against unwanted risks arising from volatility of prices. shares or bonds). They draw their price from the underlying shares traded in India. Don’t mutual fund units draw their value from the value of the portfolio of securities under the schemes. which is derivative of milk. Satyam and Infosys traded on stock exchanges in the USA and England don’t have their own values.

The market for options developed so rapidly that by early 80s the number of shares underlying the option contract sold each day exceeded the daily volume of shares traded on the New York Stock Exchange. (Ref: Wikipedia) 1 13 . was formed to allow futures trading. And there has been no looking back ever since then for Derivatives.if the long futures make profits when underlying share prices rise.Equity Options : Contracts which give used by traders or investors wherein a call or put options is bought ie the equivalent of long futures and short futures but unlike the futures position which makes profit . In April 1973. Options the pay-off is only when exiting our positions so its less riskier than futures which means the loss is restricted the loss is only to the premium amount paid and the profit position is unlimited when into a Options contract the premium is paid and if in one week the premium rises due to underlying market movements then the position can be exited and make profits in that position History of “Derivatives” Derivatives trading in 1865 by Chicago Board of Trade listed the first exchange traded futures contract in the USA. Its name was changed to Chicago Mercantile Exchange (CME). the Chicago Board of Options Exchange was set up specifically for the purpose of trading in options. In 1919 The Chicago Butter and Egg Board. a spin-off of CBOT.

1 14 . now cotton and oil futures trade in Mumbai. Distinct groups of derivative contracts: There are two groups of derivative contracts. the demand for products based on financial instruments such as bond.  Exchange-traded derivatives are those derivatives that are traded via stock exchanges. Recently futures contract in various commodities were allowed to trade on exchanges. Options trading on Sensex and Nifty commenced in June 2001. spices. coffee futures in Bangalore etc. and takes Initial margin from both sides of the trade to act as a guarantee. A stock exchange like NSE and BSE acts as an intermediary to all transactions. National Stock Exchange and Bombay Stock Exchange started trading in futures on Sensex and Nifty. cotton and oil etc for decades in the gray market. stocks and stock indices—have now far outstripped that for the commodities contracts. forward rate agreements. Trading derivatives contracts in organized market was legal before Morarji Desai’s government banned forward contracts. without going through an exchange like NSE and BSE Swaps. For example. Although trading in agricultural and other commodities has been the driving force behind the development of derivatives exchanges. pepper futures in Kochi. coffee. currencies. soybean futures trade in Bhopal. which are distinguished by the way that they are traded in market:  Over-the-counter (OTC) derivatives are contracts that are traded directly between two parties. Derivatives on stocks were traded in the form of Teji and Mandi in unorganized markets. gold. In June 2000. and exotic options are almost always traded in this way. There are host of Derivatives products available in NSE and BSE in India.DERIVATIVES TRADING IN INDIA The derivatives markets has existed for centuries as a result of the need for both users and producers of natural resources to hedge against price fluctuations in the underlying commodities. India has been trading derivatives contracts in silver.

OTC (Over the Counter) derivatives markets: The OTC derivatives markets have seen sharp growth over the last years. While both exchange-traded and OTC derivative contracts offer many benefits. The recent developments in IT have contributed to a great extent to these developments. These options expire on the last Thursday of the expiring month. (Ref: www. These options are introduced on Monday of every week and have a maturity of 2 weeks. It has been widely discussed that the highly leveraged institutions and their OTC derivative positions were the main cause of turbulence in stock markets in the year 1998. the former have rigid regulations compared to the latter. 2004 on 4 stocks and the BSE Sensex. Weekly options have the same characteristics as that of the Monthly Stock Options (stocks and indices) except that these options settle on Friday of every week. There was a need felt in the market for options of shorter maturity.Exchange-traded vs. Recent Derivative products Weekly Options: Equity Futures & Options were introduced in India having a maximum life of months. expiring on Friday of the expiring week.bseindia. which has accompanied the development of commercial and investment banking and globalisation of financial activities. These episodes of turbulence revealed the risks posed to market stability coming from the features of OTC derivative instruments and markets. To cater to this need of the market participants BSE launched weekly options on September 13.com) 1 15 .

between two private parties Ex: Tea grower may enter into a contract with a wholesale buyer to sell Tea at a particular price on a future date. The Tea buyer could have a mutually agreed contract with the seller (Forward Contract). The futures price. the price is quoted per share. naturally.e. the minimum quantity that you can buy or sell. The pre-set price is called the futures price. the contract would be settled in cash.200 * 0. converges towards the settlement price on the delivery date. He / she could buy a contract through a regulated market like the Coffee Futures Exchange India Limited (COFEI). is 1. i. contracted on a futures exchange. Futures: Futures contract is a standardized contract.200 shares of Satyam.05) = Rs60 per contract/market lot. to buy or sell a certain underlying instrument at a certain date in the future. at a pre-set price. 2007.Common contract types There are three major classes of Derivatives contracts : Forwards : Which are contracts to buy or sell an asset at a future date. The future date is called the delivery date or final settlement date. and the closing price in the cash market on the expiry day would be settlement price 1 16 . Ex: Coffee grower may enter into a contract with a wholesale buyer to sell Coffee at a particular price on a future date. the tick size is 5 paise per share or (1. The price of the underlying asset on the delivery date is called the settlement price. the contract would expire on May 28. The National Stock Exchange and the Bombay Stock Exchange offer such facilities for trading Futures contracts on an underlying financial instrument like stocks/shares. Example: when you are dealing in August Satyam futures contract the market lot.

it acts as buyer to seller and as a seller to the buyer and guarantees the trades. and mode of settlement. Contracts on Futures markets are fixed in terms of contract size. however. which is not possible in the cash market  An investor can buy and sell index instead of individual securities when he has a general idea of the direction in which the market may move in the next few months. expiry. Forward contracts are mutually agreed between two parties. Futures markets. Forwards are important as prices in Forward markets serve as indicator of Futures prices. The only benefit of entering into a Forwards contract comes from the flexibility of having tailor-made contracts.Difference between Forwards and Futures contract: Futures contracts are traded on an exchange. Counter party risk is also eliminated in the Futures market as the designated Clearinghouse becomes counter party to each trade that is. This means trading in stock index futures is a leveraged activity since the investor is able to control the total value of the contract with a relatively small amount of margin. product type. provide liquidity as contracts are traded on a broader client base. 1 17 .  The investor is required to pay a small fraction of the value of the total contract as margin. Features of futures contracts:  Leveraged positions--only margin required for taking up positions  Trading in either direction--short/long positions  Index trading are possible  Hedging/Arbitrage opportunity exists  The settlement price is available Advantages of Futures over cash trading:  In futures the investor can short sell/buy without having the stock and carry the position for a long time. product quality.

Alternatively he can take futures position in the stock by paying Rs30 towards initial and mark-to-market margin. This option gives you the right to buy 2.  In the case of individual stocks. which remain outstanding on the expiration date.e about 33% returns. which is not the case in futures. 2007 whenever asked. individual stock options etc.000 shares of HUL at Rs250 per share on or before May 28. He will then make Rs10 on an investment of Rs100.Example: Suppose the investor expects a Rs100 stock to go up by Rs10. The seller of this call option who has given you the right to buy from him is under the obligation to sell 2. such as stock index options. the positions. One option is to buy the stock in the cash segment by paying Rs100. i.000 shares of HUL at Rs250 per share on or before May 28. 1 18 . 2007. giving about 10% returns. For entering into an option transaction Example: Suppose you have bought a call option of 2. Here he makes Rs10 on an investment of Rs30.000 shares of Hindustan Unilever Ltd (HUL) at a strike price of Rs250 per share. The next class of Derivative product is: Options : Which are contracts that give the buyer the right (but not the obligation) to buy or sell an asset at a specified future date. will have to be settled by physical delivery.  Regulatory complexity is likely to be less in the case of stock index futures compared to the other kinds of equity derivatives.

When the spot / cash price is higher than the Strike price (plus cost). the buyer of Call could exercise his “right to buy” at the Strike price. The seller of this call option who has given you the right to buy from him is under the obligation to sell 2. 2007 whenever asked.000 shares of HUL at Rs250 per share on or before May 30. CALL Option: “Buyer” of a Call Option on a particular stock “gets the right to Buy” the underlying Stock. whereas “Seller/Writer” of the Put Option is “obliged to Buy” the underlying Stock if the buyer of Put decides to Exercise his / her Option.000 shares of Hindustan Unilever Ltd (HUL) at a strike price of Rs 250 per share. whereas “Seller / Writer” of the Call Option is “obliged to Sell” the underlying stock when the buyer of Call decides to Exercise his / her Option. the buyer of Put could exercise his “right to sell” at the Strike price. PUT Option: “Buyer” of a Put Option on a particular Stock “gets the right to Sell” the underlying Stock.000 shares of HUL at Rs250 per share on or before May 30. This option gives you the right to buy 2. unlimited profit-call options  Higher returns. Example: Suppose you have bought a call option of 2. 1 19 .Features of Options:  Limited risk. higher risk-put options  Positions in all market conditions/views There are two types of Options: “CALL” and “PUT”. When the spot / cash price (less cost) is lower than the Strike price. 2007.

000 shares of HLL at a strike price of Rs250 per share. Swaps : where the two parties agree to exchange cash flows. both the buyer and the seller are under obligation to fulfill the contract and the buyer and seller are subject to unlimited risk of losing. But in Options the seller of the option has limited potential to gain while the buyer of the has unlimited potential to gain.000 shares of HLL at Rs250 per share on or before March 30. The two commonly used swaps are :  Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency  Currency swaps : These entail swapping both principal and interest between the parties. This option gives its buyer the right to sell 2. The seller is subject to unlimited risk of losing whereas the buyer has a limited potential to lose. in futures the buyer and seller have unlimited potential to gain.Example: suppose you bought a put option of 2. But in Options. On entering an Option contract the buyer “gets the right” and the seller (also called the writer) “has the obligation”/ “gives the right”. 2007 whenever asked. with the cashflows in one direction being in a different currency than those in the opposite direction 2 20 . Difference between Options and Futures: Understanding Options requires understanding of concepts of “right” and “obligation”.000 shares of HLL at Rs250 per share on or before March 30. But in futures. The seller of this put option who has given you the right to sell to him is under obligation to buy 2. 2007.

For this he pays an initial margin. Hedging is not confined to the private sector. Some countries are already making extensive use of futures and options for this purpose. They use futures or options markets to reduce or eliminate this risk. Governments use this to stabilize a country’s export earnings or to protect farmers producing export crops. The term comes from a gambling saying "hedging your bets. Now if the price of the security he holds falls further he will suffer losses on the security he holds. Hedging. Assume that the spot price of the security he holds is Rs ." Hedging is a strategy designed to minimize exposure to an unwanted business risk. Two-month futures cost him Rs. while still allowing the business to profit from an investment activity. 402. A hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. Typically.390.PLAYERS IN THE DERIVATIVE MARKET : The following three broad categories of participants are Hedgers: Hedgers face risk associated with the price of an asset. 390 . with security futures he can minimize his price risk All he need to do is enter into an offsetting stock futures position . in this case take on a short futures position . 450 to Rs. in its broadest sense. In the absence of stock futures he would either suffer the discomfort of a price fall or sell the security in anticipation of a market upheaval . a hedger might invest in a security that he believes is under-priced relative to its "fair value". He sees the value of his security falling from Rs. is the act of protecting oneself against loss. Governments also use it. Ex: Take the case of investor who holds the shares of a company and gets uncomfortable with market movements in the short run . However the losses he suffers will be offset by the profit he makes on his short futures position. 2 21 .

Similarly. It must be noted that the practice of speculation. in practice the arbitrageur is not a separate person. Arbitrageurs: Arbitrage can be described as a transaction involves buying and selling a good or asset in two different markets in order to achieve a risk less profit through the difference in price between them. easily and without unduly affecting the market price. The speculators have no specific interest in the commodity rather they are risk seekers whose interest stems from the profit which they expect to make from assuming the price risk. the price of crude oil). Arbitrage plays a big role in ensuring that prices in 2 22 . It is here that the role of the speculator becomes apparent. speculative activity increases the liquidity of markets thereby enabling hedgers to transact large volumes of business on the market quickly. It is the speculators who take up the slack in the market and provide liquidity. we can say yes as there can be no effective hedging since the volume of demand for long and short hedging will not be equal except by occasional coincidence. uncertainty is often referred to as ‘risk’. by facilitating hedging. either a hedger or a speculator can indulge in arbitrage when the opportunity arises. Of course. Secondly. hedging can also be described as a form of ‘insurance’ against non-insurable risks. In a broadest sense we can say an arbitrageur is one who trades only to realize profits from discrepancies in the market. Since.g. Based on the above explanation hedging can thereof be described as a “method of protection against uncertainty”. Let us see the main use of speculation. reduces the costs of marketing. Speculators: If a futures market is restricted to hedgers alone. futures and options can be (and are) used by governments to hedge against short-term rises in import prices (e. However it provides a lower degree of protection than insurance since hedges are often only partially effective. in common and less rigorous parlance. it is quite conceivable that one or other group of hedgers would be unable to hedge without distorting the price because of the absence of counter parties to the transactions.

The maximum risk to the buyer of an Option is limited to the Premium paid. This is an arbitrage transaction. 82 in the Bombay Stock Exchange while at the same time the price in the Delhi Stock Exchange is Rs. bearish. By so doing he realizes a profit of Rs. Example: On a particular day. The writer is at risk of having his / her position assigned by a profitable buyer who Exercises his / her position. covered calls. For a seller / writer the risk increases considerably as the market moves against him / her.futures markets do not diverge from the level dictated by supply and demand and in ensuring speedy correction of any pricing anomalies. 2 23 . The risks involved in trading on derivatives are:  Futures carry similar risks as their underlying stocks.A stockbroker simultaneously buys the share in Delhi and sells it in Bombay. DERIVATIVES ARE USED WIDELY BECAUSE:  Leveraged positions  Lower margins than the margin funding  Index trading--market directional trading  Hedging of portfolio  Through index. 2 without any risk and with hardly any capital (barring any margin required to put through the trade). NSE requires individual investors to maintain adequate amounts as margins against risk of loss. volatile or neutral. the shares of TNPL are selling at Rs. 80. options buying  Structured products for higher yields  Allows taking position in any market condition--bullish.

000. There is no minimum/maximum Price Bands. That is. They could also be traded in larger quantities like 1200.00 in cash market. they “can be exercised on any day before expiry date”. each trade has to be a minimum quantity of 600 Satyam Computer stocks.00 as against a loss of Rs. The daily Futures settlement price acts as the base price for subsequent days. That is. On the other hand NIFTY Options are European Options.00 in cash market to Rs. In the Futures market a minimum of 100 (one lot) INFOSYSTCH has to be traded. Previous day’s closing price of the underlying stock acts as the base price for introduction of new Futures contracts in the beginning of a new month. to prevent operating errors 20% of the base price is maintained as an operating range.4000.20.00.00 in the Futures Market.300. A fall of Rs.00 in the Futures market. Advanced concepts in derivatives: Stocks that can be traded in derivatives segment: Currently on the NSE 120 stocks are trading in the derivatives markets. Contract sizes are determined by the exchange. For example: A trader could buy/sell 15 INFOSYSTCH at say Rs.00 in cash market amounts to a loss of Rs.60.000.4. Options are exercised by: Stock options on the NSE are American Options. That is. Futures trading are inherently riskier than trading in cash because of the higher values of contracts involved. 1800 etc. For example the contract size for Satyam Computer is 600 stocks. However. Hence the total value of trade has increased from Rs.2000. Exercise prices: 2 24 . they “can be exercised only on the day of expiry”.

There are two levels of margins to be paid at the client level. Meaning of Out-of-money Option: Ones that provide negative cash flows if exercised immediately are called Out-of-money Options. This value determines the gross exposure to be taken by the investor. and the extent of Hedging used. This amount is due on T+1. NSE uses software called SPAN to calculate margins. T is the day of trading. Once the position is Exercised / Assigned this position ceases to exist. Meaning of In-the-money Option: Options that provide the holder positive cash flows if exercised immediately are called In-the-Money options. The extent of exposure given on a particular margin amount depends on several factors including the Volatility of the scrip.  Initial Margin amount is charged upfront. It is also the maximum amount that the buyer stands to lose when the market moves against his / her expectations. Up to 30% of total Initial margin can be paid in stocks. Meaning of At-the-money Option: Options that provide the holder zero cash flows if exercised immediately are called At-the Money options. 2 25 . the Open interest on the scrip.The price at which Exercise takes place is day’s closing price of underlying stock. Initial Margin and Marked-to-market margin. Similarly. When a buyer Exercises his / her position a seller’s position automatically gets assigned. the seller of options receives the premium amount on T+1. The out flows while trading in Options are: The buyer of an option pays a small amount as Premium to the seller for privilege of getting the right to exercise his / her option. Here.

The fair value of a one-month futures contract on xyz is calculated as follows: F= SerT = 1150*e0. This margin acts as a security against intra-day losses. This in turn would push the futures price back to its fair value. the difference between the Contract price and Closing price of the underlying scrip determines the net gain or loss on the contract. The cost of carry model used for pricing futures is given below: F= SerT Where. Any debits/losses above the MTM margin is required to be paid on the next day of the trade (T+1). Mark to Market margin (MTM): A minimum percentage of Initial margin value is required to be maintained as marked-to-market margin. This percentage could be up to 20% of IM.  Variance margin: On a particular day.11*1/12 = 1160. (See annexure) Pricing Futures: Pricing of Futures contract is very simple. Every time the observed price deviates from the fair value. Money can be invested at 11% pa. r = Cost of financing (using continuously compounded interest rate) T = time till expiration in years e = 2. arbitragers would enter into trades to capture the arbitrage profit. It is by calculating the fair value of a futures contract. 1150.71828 Example: Security xyz ltd trades in the market at rs. 2 26 . Using the cost of carry logic.

The worst that can happen to a buyer is the loss of the premium paid to him. but his upside is potentially unlimited.. Just like other free markets. 2 27 . There are various models. The Black-Scholes formulas for the prices of European calls and puts on a non-dividend paying stock are: C= SN (d1) – Xe-rT N (d2) P= Xe -rT N (-d2)-SN (-d1) Where d1= In s/x + (r+2 /2) T  Where d2= d1.Pricing Options: An Option buyer has the right but not the obligation to exercise on the seller. it’s the supply and demand in the secondary market that drives the price on an option. His downside is limited to this premium. which help us get close to the true price of the option.

In this section we shall look at the payoffs for buyers and sellers of futures and option. The underlying asset in this case is the nifty portfolio. Payoff for buyer for futures: long futures The payoff for a person who buys a futures contract is similar to the payoff for person who holds an asset. In simple words it means that losses as well as profits for the buyer and the seller of futures contract are unlimited. When the index moves up. He has a potentially unlimited upside as well as potentially unlimited downside take case of speculator who buys a two-month nifty index futures contract when the nifty stands 4220. it starts making profits and when the index moves down it starts making losses. Profit 4220 2 28 .Payoff for derivatives contracts: A payoff is the likely profit/loss that would accrue to a market participant with change in the price of the underlying asset. These linear payoffs are fascinating as they can be combined with options and the underlying to generate various complex payoffs. Payoff for futures: Futures contract has linear payoffs.

0 Nifty Loss Payoff for seller of futures: short futures: The payoff for a person who sells a futures contract is similar to the payoff for person who shorts an asset. Profit 4220 0 Nifty Loss Options payoffs 2 29 . When the index moves down. The underlying asset in this case is the nifty portfolio. it starts making profits and when the index moves up it starts making losses. He has a potentially unlimited upside as well as potentially unlimited downside take case of speculator who sells a two month nifty index futures contract when the nifty stands 4220.

the payoff is exactly the opposite. s`. Profit +60 3 30 . it means that the losses for the buyer of an option are limited. In simple words. His profits are limited to the option premium. an investor buy the underlying asset. Nifty for instance. Once it is sold. for 4220 and sells it at a future date at unknown price. Profit +60 0 4160 4220 4280 Nifty -60 Loss Payoff profile for seller of asset: Short asset In this basic position.The optionality characteristics of options results in a non-linear payoff for options. however the profits are potentially unlimited. For a writer. Once it is purchased. and buys it back at the future date at an unknown price. s`. an investor shorts the underlying asset. the investor is said to be “short” the asset. however his losses are potentially unlimited. Payoff profile of buyer of asset: long asset In this basic position. the investor is said to be “long” the asset. for 4220. nifty for instance.

If upon expiration. Hence as the spot price increases the writer of the option starts making losses.0 4160 4220 4280 Nifty -60 Loss Payoff profiles for buyer of call options: Long call A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option. Profit 4250 0 Nifty 86. For selling the option. the spot price exceeds the strike price. Whatever is the buyer’s profit is the seller’s loss. His loss in this case is the premium he paid. If upon expiration. 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. he lets his option expire un-exercised. the buyer will exercise the option on the writer. he makes a profit. Higher the spot price. more is the profit he makes.60 Loss Payoff profiles for writer of call options: Short call A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option. If the spot price of the underlying is less than the strike price. The profit/loss that the buyer makes on the option depends on the spot price of the underlying. the writer of the option charges a premium. Higher the spot 3 31 .

The profit/loss that the buyer makes on the option depends on the spot price of the underlying. he makes a profit.price. the buyer lets his option expire un-exercised and the writer gets to keep the premium. the spot price is below the strike price. Profit 86. Lower the spot price.70 3 32 . If the spot price of the underlying is higher than the strike price. he lets his option expire un-exercised. more is the loss he makes. Profit 4250 0 Nifty 61.60 4250 0 Nifty Loss Payoff profile for buyer of put option: Long put A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. His loss in this case is the premium he paid for buying the option. If upon expiration the spot price of the underlying is less than the strike price. more is the profit he makes. If upon expiration.

Loss

Payoff profile for writer of put option: Short put
A put option gives the buyer the right to sell the underlying asset at the strike price
specified in the option. For selling the option, the writer of the option charges a premium.
The profit/loss that the buyer makes on the option depends on the spot price of the
underlying. Whatever is the buyer’s profit is the seller’s loss. If upon expiration, the spot
price happens to be below the strike price, the buyer will exercise the option on the
writer. If upon expiration, the spot price of the underlying is more than the strike price,
the buyer lets his option expire un-exercised and the writer gets to keep the premium.

Profit
61.70
4250
0

Nifty

Loss

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Now we will look at the basic Equity Derivative strategies widely used
BASIC STRATEGIES IN EQUITY
BUY CALL

Pay-off

When very bullish on the stock
BUY PUT
When very bearish on stock
SELL PUT
When sure that the price will not fall
BULL SPREAD
Call option is bought with a lower strike price of and
another call option sold with a higher strike,
OR
Put option is bought with a strike of lower strike and
another put sold with a higher strike.
When the stock will go up somewhat or at least is a bit more
likely to rise than to fall
BEAR SPREAD
Put option is bought with a higher strike price and another
put option sold with a lower strike,
OR
Call option is bought with a higher strike price and another
call sold with a lower strike.
When the stock will go down somewhat or at least is a bit
more likely to fall than to rise.
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SELL COVERED CALL
Call option against the stock holding is sold.
When sure that the price of the stock you hold will not fall.
BUY STRADDLE
Call option and put option are bought with the same strike usually at-the-money.
When the stock is expected to move far enough in either
direction in the short-term.
BUY STRANGLE
Put option is bought with a strike A and a call option is
bought with a strike B. ( A > B)
When the stock is expected to move far enough from the
predefined range.
BUY BUTTERFLY
Call option with low strike bought and two call options with
medium strike sold and call option with high strike bought.
The same position can be created with puts.
When the stock price is expected to fluctuate in a narrow
range.
SELL BUTTERFLY
Call option with low strike sold and two call options with
medium strike bought and call option with high strike sold.
The same position can be created with puts.
When the stock price are expected to move substantially

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Using index futures
There are eight basic modes of trading on the index futures market:

Hedging

1. Long security, short Nifty futures
2. Short security, long Nifty futures
3. Have portfolio, short Nifty futures
4. Have funds, long Nifty futures

Speculation

1. Bullish index, long Nifty futures
2. Bearish index, short Nifty futures

Arbitrage

1. Have funds, lend them to the market
2. Have securities, lend them to the market

Ref: (NCFM Derivatives)

Hedging: Long security, short Nifty futures
A stock picker carefully purchases securities based on a sense that they are worth more
than the market price. When doing so, he faces two kinds of risks:
1. His understanding can be wrong, and the company is really not worth more than the
market price; or,
2. The entire market moves against him and generates losses even though the underlying
idea was correct.
The second outcome happens all the time. A person may buy Reliance at Rs.1911
thinking that it would announce good results and the security price would rise. A few
days later, Nifty drops, so he makes losses, even if his understanding of Reliance was
correct.
There is a peculiar problem here. Every buy position on a security is simultaneously a
buy position on Nifty. This is because a LONG RELIANCE position generally gains if
Nifty rises and generally loses if Nifty drops. In this sense, a LONG RELIANCE position
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is not a focused play on the valuation of Reliance. It carries a LONG NIFTY position
along with it, as incidental baggage. The stock picker may be thinking he wants to be
LONG RELIANCE, but a long position on Reliance effectively forces him to be LONG
RELIANCE + LONG NIFTY.
There is a simple way out. Every time you adopt a long position on a security, you should
sell some amount of Nifty futures. This offsets the hidden Nifty exposure that is inside
every long–security position. Once this is done, you will have a position which is purely
about the performance of the security. The position LONG RELIANCE + SHORT
NIFTY is a pure play on the value of RELIANCE, without any extra risk from
fluctuations of the market index. When this is done, the stock picker has “hedged away”
his index exposure. The basic point of this hedging strategy is that the stock picker
proceeds with his core skill, i.e. picking securities, at the cost of lower risk.

Hedging: Short security, long Nifty futures
Investors studying the market often come across a security which they believe is
intrinsically Over-valued. It may be the case that the profits and the quality of the
company make it worth a lot less than what the market thinks. A stock picker carefully
sells securities based on a sense that they are worth less than the market price. In doing so
he faces two kinds of risks:
1. His understanding can be wrong, and the company is really worth more than the
market price; or,
2. The entire market moves against him and generates losses even though the underlying
idea was correct.
The second outcome happens all the time. A person may sell Reliance at Rs.1900
thinking that Reliance would announce poor results and the security price would fall. A
few days later, Nifty rises, so he makes losses, even if his intrinsic understanding of
Reliance was correct. There is a peculiar problem here. Every sell position on a security
is simultaneously a sell position on Nifty.

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This statement is true for all portfolios. with the index futures market. At other times. This allows rapid response to market conditions. they may have a view that security prices will fall in the near future. This leads to political pressures for government to “do something “when security prices fall. Many investors simply do not want the fluctuations of these three weeks. without “panic selling” of shares. a third and remarkable alternative becomes available: 3 Remove your exposure to index fluctuations temporarily using index futures. It allows an investor to be in control of his risk. i. Sometimes. instead of doing nothing and suffering the risk. suffer the pain of the volatility. When you have such anxieties. there are two alternatives: 1 Sell shares immediately. they may see that the market is in for a few days or weeks of massive volatility. 2 Do nothing. short Nifty futures The only certainty about the capital market is that it fluctuates! A lot of investors who own portfolios experience the feeling of discomfort about overall market movements. In addition. 3 38 . whether a portfolio is composed of index securities or not. and they do not have an appetite for this kind of volatility. The union budget is a common and reliable source of such volatility: market volatility is always enhanced for one week before and two weeks after a budget. Every portfolio contains a hidden index exposure.Hedging: Have portfolio.e. This sentiment generates “panic selling” which is rarely optimal for the investor.

or good corporate results. It takes several weeks from the date that it becomes sure that the funds will come to the date that the funds actually are in hand  An open-ended fund has just sold fresh units and has received funds. he can buy selected liquid securities. which move with the index. many people feel that the index would go up. Some common occurrences of this include:  A closed-end fund that just finished its initial public offering has cash. long Nifty futures After a good budget. buy the entire index portfolio and then sell it at a later date. which is not yet invested. or bad corporate results. Speculation: Bullish index. Speculation: Bearish index. or the onset of a stable government. which needed to get invested in equity? Or of expecting to obtain funds in the future which will get invested in equity.Hedging: Have funds.  Suppose a person plans to sell land and buy shares. There is two choices sell selected liquid 3 39 . and sell them at a later date: or. The land deal is slow and takes weeks to complete. many people feel that the index would go down. buy Nifty futures Have you ever been in a situation where you had funds. short Nifty futures After a bad budget. or the onset of a coalition government. An investor has two choices.

Using futures on individual securities: Hedging: Long security.securities. sell futures Stock futures can be used as an effective risk–management tool. Traditional methods of loaning money into the security market suffer from (a) price risk of shares and (b) credit risk of default of the counter-party. without suffering the risk. and without bearing any credit risk. as he like until the futures expiration. lend them to the market Owners of a portfolio of shares often think in terms of juicing up their returns by earning revenues from stock lending. Arbitrage: Have funds. However. he would buy back his shares. stock lending schemes that are widely accessible do not exist in India. He can deploy this money. The main advantage of the index futures market is that it supplies a technology to lend money into the market without suffering any exposure to Nifty. On this date. lend them to the market Most people would like to lend funds into the security market. and pay for them. which move with the index. and buy them at a later date: or. sell the entire index portfolio and then buy it at a later date. Take the case of an investor who holds the shares of a company and gets uncomfortable with market 4 40 . Arbitrage: Have securities. Investor will sell off all 50 securities in Nifty and buy them back at a future date using the index futures. The basic idea is quite simple. The index futures market offers a riskless mechanism for (effectively) loaning out shares and earning a positive return for them. He will soon receive money for the shares he has sold.

1.movements in the short run. The security trades at Rs. However. In the absence of stock futures. he would either suffer the discomfort of a price fall or sell the security in anticipation of a market upheaval. Futures will now trade at a price lower than the price at which he entered into a short futures position. He buys 100 security futures for which he pays a margin of Rs. assume that the minimum contract value is 1. Two months later the security closes at 1010.00. For this he pays an initial margin. the futures price converges to the spot price and he makes a profit of Rs. in this case.20. Now if the price of the security falls any further. The fall in the price of the security will result in a fall in the price of futures. Assume he buys a 100 shares which cost him one lakh rupees. This works out to an annual return of 4 41 . will be made up by the profits made on his short futures position.1000 is undervalued and expect its price to go up in the next two–three months.000 for a period of two months.1010. How can he trade based on this belief? In the absence of a deferral product. The loss of Rs.350. With security futures he can minimize his price risk.00. Assume that the spot price of the security he holds is Rs. He would like to trade based on this view. take on a short futures position.000. On the day of expiration. This works out to an annual return of 6 percent. He believes that a particular security that trades at Rs.40 incurred on the security he holds.402. His hunch proves correct and two months later the security closes at Rs.000.390. Just for the sake of comparison.390. Take for instance that the price of his security falls to Rs. Let us see how this works. buy futures Take the case of a speculator who has a view on the direction of the market. he would have to buy the security and hold on to it. Hence his short futures position will start making profits. Speculation: Bullish security.400 on an investment of Rs. He makes a profit of Rs.450 to Rs.1000 on an investment of Rs. All he need do is enter into an offsetting stock futures position. He sees the value of his security falling from Rs.000. the losses he suffers on the security. will be offset by the profits he makes on his short futures position. Today a speculator can take exactly the same position on the security by using futures contracts.1000 and the two-month futures trades at 1006. Two–month futures cost him Rs.20. he will suffer losses on the security he holds.

so will the futures price.12 percent. If the security price falls. Because of the leverage they provide. How can he trade based on his opinion? In the absence of a deferral product. 3. Whenever the futures price deviates substantially from its fair value. there wasn’t much he could do to profit from his opinion. you can make riskless profit by entering into the following set of transactions. security futures form an attractive option for speculators. Arbitrage: Overpriced futures: buy spot. Simultaneously. as long as there is sufficient liquidity in the market for the security. Let us understand how this works. how can you cash in on this opportunity to earn riskless profits. If you notice that futures on a security that you have been observing seem overpriced. arbitrage opportunities arise. 1.1025 and seem overpriced. Speculation: Bearish security. buy the security on the cash/spot market at 1000. so will the futures price. Today all he needs to do is sell stock futures. borrow funds. sell futures Stock futures can be used by a speculator who believes that a particular security is over– valued and is likely to see a fall in price. Say for instance. sell the futures on the security at 1025. Simple arbitrage ensures that futures on an individual securities move correspondingly with the underlying security. ABC trades at Rs. 2. Take delivery of the security purchased and hold the security for a month. If the security price rises. 4 42 . As an arbitrageur. On day one.1000. One–month ABC futures trade at Rs. sell futures The cost-of-carry ensures that the futures price stay in tune with the spot price.

Return the borrowed funds.10. 6. Futures position expires with profit of Rs. Say the security closes at Rs.975.1000. one has to build in the transactions costs into the arbitrage strategy.4. As an arbitrageur. buy the futures on the security at 965. 6. 5. it makes sense for you to arbitrage. 4. Say the security closes at Rs. ABC trades at Rs. It could be the case that you notice the futures on a security you hold seem underpriced. 4 43 . that exploiting an arbitrage opportunity involves trading on the spot and futures market. On the futures expiration date. you can make riskless profit by entering into the following set of transactions. Arbitrage: Underpriced futures: buy futures. 7.1015. 3. 965 and seem underpriced. arbitrage opportunities arise. Remember however. Make delivery of the security. On day one. How can you cash in on this opportunity to earn riskless profits? Say for instance. the spot and the futures price converge.15 on the spot position and Rs. 5. On the futures expiration date. Buy back the security. sell the security in the cash/spot market at 1000.10 on the futures position. In the real world. When does it make sense to enter into this arbitrage? If your cost of borrowing funds to buy the security is less than the arbitrage profit possible. Now unwind the position. One–month ABC futures trade at Rs. The result is a risk less profit of Rs. Now unwind the position. 8.10. The futures position expires with a profit of Rs. Simultaneously. 1. Sell the security. 2. sell spot Whenever the futures price deviates substantially from its fair value. This is termed as cash–and–carry arbitrage. the spot and the futures price converge.

sell call option When we are bearish about the market we can buy a put option and pay premium on it. And the person whom we sell the put option will be under loss so he will forego the contract hence we will also keep the premium he gave us as profit.7. this is because incase the market goes up we can be hedged against the losses.25 on the spot position and Rs.10 on the futures position. If the returns you get by investing in riskless instruments is less than the return from the arbitrage trades. and get premium on it. When we are bearish about the market: Buy put option. And the person whom we sell the call option will be under 4 44 . As more and more players in the market develop the knowledge and skills to do cash–and–carry and reverse cash–and–carry. So we will earn a profit. Take in this situation the spot price falls below the strike price we will exercise the option because we will have the right to sell. this is because incase the market comes down we can be hedged against the losses. Using Options When we are bullish about the market: Buy call option. exploiting arbitrage involves trading on the spot market. it makes sense for you to arbitrage. we will see increased volumes and lower spreads in both the cash as well as the derivatives market. Simultaneously we can sell a call option. sell put option When we are bullish about the market we can buy a call option and pay premium on it. It is this arbitrage activity that ensures that the spot and futures prices stay in line with the cost–of–carry. As we can see. Take in this situation the spot price rises above the strike price we will exercise the option because we will have the right to buy. So we will earn a profit. and get premium on it. This is termed as reverse–cash–and– carry arbitrage. Simultaneously we can sell a put option. The result is a riskless profit of Rs.

Initially. and subsequently. short positions seems to have been created by the informed circles. informed circle is reported to be short in the counter. The share price of RPL has witnessed a lot of volatility. when share price fell from Rs. in F&O.275 plus. apart from additional open interests for Put and Call.223 per share.023 crores. As to why F&O trading in a NIFTY 50 stock came under a ban in F&O Segment Reliance Industries Ltd. in the current month series of November. (RPL). This was also first instance when a scrip of NIFTY 50. for matching open interest. at the higher levels of Rs. especially in F&O segment. due to Market Wide Limit having crossed 95%. majority of them are long on the scrip. when cash segment ruled higher than F&O. in options segments at various rates for three months. they kept continuing with open position.01% stake of RPL.04 crores equity shares. holding company of Reliance Petroleum Ltd. This has reduced stake of RIL in the RPL from 75% to 70.4.215. being 18. even after paying mark to market losses and incremental margins.loss so he will forego the contract hence we will also keep the premium he gave us as profit.99%.295 to now at Rs. This has resulted in reverse arbitrage. has sold about 4. the scrip has resumed trading again in F&O. from today. imposed due to higher volatility. till last week. at an average price of Rs. The market report indicates that about 12 crore shares are in open interest in future segment. was also under ban. and since the scrip was under ban. for Rs. thus realizing an average of Rs. Conversely. While taking a feel of retail investors' position. came under ban in F&O segment.223 per share. The scrip RPL. (RIL). obviously. But now. This also indicates paucity of floating stock. Shareholding pattern of RPL is as under :-4 45 . finding these price levels as unrealistic. Downside of Derivatives with few live examples A case study on recent developments in RPL. actual sell has been triggered by RIL in cash market. till Friday.

in company's 33 rd AGM held in October in Mumbai. Rs.6. effective cost of 71% stake in RPL. has been earned by RIL.700 crores 2) 67.4. shares at par Rs.00 cr.050 crores 337.50 cr shares being 75% 22. and 71% stake is quite reasonable. which would vastly improve the 4 46 .750 crores Total RIL has almost realized its cost of Rs. shares having subscribed at par were presumed to have been sold.375 crores Rs. shares being 20% 450.225 crores Rs.5 cr. shares being 5% 90.8. So.60 per share. could predict this move. Since. had stated that the company would be capitalizing on the investments held.3.000 crores.60 per share Rs.67.00 cr.842 crores. likely to be taken by RIL at a future date.50 shares. Nobody. shares at Rs. that Chairman of RIL. including that of RPL.54 .900 crores Rs. at Rs. The market value of this is close to Rs. Now what could be likely move and developments.2.4.3. which is tax free.727 crores. on which long term capital gain of Rs. investments sold are based on FIFO (first in first out) basis.50 cr. in the mega refinery. One may recall. in April 2006.1) 2) 3) RIL Chevron Public Total 337.4.500 crores RIL has acquired its 75% stake as under :-1) 270 cr. post this minority stake sale: 1) The control of RIL on RPL is not affected as this is a minor dilution. cost per share at Rs. translating into.2.050 crores for subscribing 67. for 319. Mukesh Ambani.50 cr.46 crores shares are Rs. shares being 100% Rs.

RIL would be able to raise its stake. with an option to raise it to 29% by June 09. having initiated shorts in F&O at an average of Rs. and keeping its stake in RPL at 70%.1.30.60 per share. based on SEBI formula. Hence. 2) RIL would have an other income of Rs.350 crores. presently has 5% stake in RPL.99% stake. being 4.consolidated results of RIL. in coming times. for its capex programme at K G Basin. 5) Chevron.4.000 crores (tax free) when it needs funds. 1) As majority of retail investors are long. they would opt to roll over their positions 4 47 . post IPCL merger.200 plus.26. would opt to offload its 5% stake in favour of RIL.46 crore share. in quarter ending December 07. at a cost of just Rs.000 crore plus. 6) On happening this event. which would be at Rs. which would give an extra EPS of Rs. post commencement of refinery. Chevron. and realize close to Rs. at Rs.1. Chevron may not be interested in raising its stake to 29% as it would need close to Rs. 3) RIL has been able to mop up close to Rs.3.453 crores. (presuming market price to remain above Rs.200).275 per share. are reported to have made a gain of Rs.000 crores. back to 75%.842 crores.1.50. At this rate.1. on enhanced equity of Rs. The preferential allotment can only be made.000 crores. Now. let's take a call. 7) The informed circles. how share price of RPL is likely to behave. 4) RIL may further decide to offload . as per the terms of the share subscription Agreement.

in this case.200 per share. by RIL. weakness may not be seen from beginning of December F&O series 4) If informed circle. from investment and arbitrage view point. (Thursday 29 th November) to enable them to have a better close out. Here is a famous case that depicts the how risky the business is. The activities of Nick Leeson on the Japanese and Singapore futures exchanges led to the downfall of Barings. no more. continues. delivery based selling is expected on the counter. whereby. The build-up of the Nikkei positions by Leeson went in the opposite direction to the Nikkei . Britain's oldest merchant bank. In nutshell.as the Japanese stock market fell. they may be interested to see a lower rate. may not be interested in rolling over. which would take direction. lot of interested buying may be seen. 3) Since. as bullish outlook on the stock.in December series. below Rs. holding short position of close to 10 crore shares. this was a calculated move. Nikkei 4 48 . as that will have far reaching consequences. Also. as market perception has changed positive. The leverage and liquidity offered by futures contracts makes an institution fall with lightning speed. is a example of how not to manage a derivatives operation. on the stock. But. on the next move of the management. coupled with retaining majority and respectable stake. The control and risk management lessons to be learnt from this fall are the same as much to cash positions as they do to derivative ones. 2) Informed circle. for various reasons (no need to elaborate them). Before the earthquake. on closing day. huge cost has been recovered. the market (cash and F&O) is in full control of the management. THE BARINGS BANK DEBACLE The derivative trading is not as easy as perceived. tries to bring down the price on closing day. The events that led to the fall of Barings.

karvy. Because Leeson's official trading strategy was to take advantage of temporary price differences between the SIMEX and OSE Nikkei 225 contracts. This kind of arbitrage activity has little market risk as the positions were always matched.094 contracts reached about a month later. Barings had outstanding notional futures positions on Japanese equities and interest rates of US$27 billion: US$7 bn on the Nikkei 225 equity contract and US$20 bn on Japanese government bond (JGB) and Euro yen contracts. He also used this account to execute all his unauthorised trades in Japanese Government Bond and Euro yen futures and Nikkei 225 options: together these trades were so large that they ultimately broke Barings. their enormity is all the more astounding when compared with the banks reported capital of about $615 million.000 contracts on the Osaka Stock Exchange. Leeson sold 70. 892 Nikkei put and call options with a nominal value of $6. When it went into receivership on February 27. infact he was long approximately the number of contracts he was supposed to be short. This arbitrage. If Leeson was long on the OSE.traded in a range of 19. which Leeson established in the name of the bank.000 to 19. Leeson had long futures positions of approximately 3. reversing the trade when the price difference had narrowed or disappeared. 1995. (www.68 bn. These were unauthorised trades which he hid in an account named Error Account 88888. which Barings called 'switching'.500. required Leeson to buy the cheaper contract and to sell simultaneously the more expensive one.com/articles/baringsdebacle. But Leeson's Osaka position reflected only half of his sanctioned trades. Leeson started an aggressive buying programmed which culminated in a high of 19. The nominal size of these positions is breathtaking. A few days after the earthquake. But Leeson was not short on SIMEX. Barings collapsed as it could not meet the enormous trading obligations.htm) IMPORTANCE OF PUT-CALL PARITY RATIO (PCR) IN DERIVATIVES 4 49 . he had to be short twice the number of contracts on SIMEX.

Both bullish and bearish cases can be built around this surreal development.00. The famous Put/Call Ratio 21-day moving average has soared above 1. (This Pointer taken from www. which promise hefty payouts on higher prices. When the PCR is above 1. it indicates that the majority probably expects lower prices in the months ahead. The PCR quantifies the ratio of the daily trading volume in these two opposing bets. granting speculators valuable insights into what the majority happens to be expecting. While I certainly wish there was an easy bullet-proof interpretation of this odd event. Speculators who expect rising prices buy call options. a PCR above 1. The Put/Call Ratio.In just the past couple weeks.00 is an extraordinarily rare event. and the contrarian slant on this is complex as well. as today. Today’s high PCR anomaly is difficult to interpret.zealllc. its sudden appearance today within the context of current market conditions is a puzzling mystery. Translated into pure sentiment terms.00 for the first time in at least a decade! This odd development is vexing bulls and bears alike. And since we humans are naturally bullish.com) 5 50 . an extremely intriguing anomity has arisen in the Indian stock markets. as I will outline in this essay. derivatives bets which increase in value when prices decline. it literally means that the daily trading volume on puts is higher than calls. or PCR. is a powerful technical trading indicator that monitors the stock and stock-index bets that speculators are making at any given time. Speculators who expect individual stocks or the indices to fall in the months ahead buy put options.

3. RESEARCH METHODOLOGY 5 51 .

Research Methodology: The whole study was totally based on the primary data there was no as such formal procedure most of the research was done in the dealing room As it is one type of mechanism so a lot of time was spent to understand the concept. All over the world there are lots of stock exchanges dealing with Equity derivatives but for the purpose of the study NIFTY has been considered and various examples are quoted using Nifty and certain stock derivatives are taken for examples when strategies are quoted using examples and studying the futures and options market during different market times and trying to adopt different strategies for different types of market conditions like Bull run . The dealings of the firm with its client investors was properly observed and studied in detail. .Financial institutions. HNI’s.The dealings of the firm with its client investors will properly observed and studied in detail. The market methodology followed is primary data collected from a channel of network that involves independent .Also dealing room operations. Most important factor in this research was the dealing room operation.Questionnaire survey with the various derivatives dealers and with feedback and tips were taken from Derivatives strategist team. AMC’s. Banks. The data was primary and secondary data and collected from the Orion software and Falcon software. 5 52 .bear run and heavy volatile and during consolidation trends of the market.e. the number of cases considered during the project for various dealings. The total sample size was 50 i. The main function was to look at the screen and watch how the market is basically moving with the change in time. Brokers who use these derivative strategies or use them on behalf of their clients. .

and Derivatives materials The expected outcomes from the thesis is to understand and apply how to use the concept of equity strategies and under what market conditions we should use these Equity market strategies and try to beat the market by hedging our holdings and implies the use of all the popular equity derivatives strategies with practical examples it has been illustrated well for even a layman can understand and try to grasp how these strategies are useful in the stock markets 5 53 .And secondary data from a host of book materials.

4. DATA ANALYSIS AND INTERPRETATION 5 54 .

Stock: INFOSYSTCH View: Bullish Strategy: LONG (BUY) CALL Rationale: Technically the stock has given an upward breakout & should find a target of around 2300 in the next few trading sessions.2230/- 5 55 . 2007.000 shares of Hindustan Lever Ltd (HLL) at a strike price of Rs 250 per share.DATA ANALYSIS AND INTERPRETATION The conditions under which the use of equity derivative strategies can be analyzed by the help of using questionnaire to collect data are: 1) Strategies you normally use when market view is highly bullish Buy Call Option CALL Option: “Buyer” of a Call Option on a particular stock “gets the right to Buy” the underlying Stock. whereas “Seller / Writer” of the Call Option is “obliged to Sell” the underlying stock when the buyer of Call decides to Exercise his / her Option. 2007 whenever asked. Long Call: Initiated on 24th Mar Spot Price: Rs .000 shares of HLL at Rs250 per share on or before March 30. Example: Suppose you have bought a call option of 2.000 shares of HLL at Rs250 per share on or before March 30. When the spot / cash price is higher than the Strike price (plus cost). The seller of this call option who has given you the right to buy from him is under the obligation to sell 2. the buyer of Call could exercise his “right to buy” at the Strike price. This option gives you the right to buy 2.

.4.2295 i.45 (Lot size = 100) Result: In about a weeks’ time. strike price + premium paid MAXIMUM PROFIT: Unlimited MAXIMUM LOSS: Rs.500 per lot 5 56 .Strategy: Bought INFOSYSTECH 2250 June CA @ Rs. the call option appreciated to Rs.70 as the stock price rose and we sold off the position resulting in a profit.e. A graphical representation of this option position is given below BREAK EVEN POINT: Rs.

Index: NIFTY Outlook: Bearish Strategy: LONG (Buy) PUT Rationale: The NIFTY Index has shown a shooting star on the weekly chart which a sign of strong trend reversal.000 shares of HLL at a strike price of Rs 250 per share.000 shares of HLL at Rs 250 per share on or before March 30. whereas “Seller/Writer” of the Put Option is “obliged to Buy” the underlying Stock if the buyer of Put decides to Exercise his / her Option. 2007. the buyer of Put could exercise his “right to sell” at the Strike price. This option gives its buyer the right to sell 2. The seller of this put option who has given you the right to sell to him is under obligation to buy 2. Long Put: Initiated on 23rd April Spot value: 3930 levels Strategy: Bought NIFTY 3900 May PA @ Rs. 2007 whenever asked. When the spot / cash price (less cost) is lower than the Strike price.120 (Lot size = 50) 5 57 .000 shares of HLL at Rs 250 per share on or before March 30.2) Strategies you use when market view is highly bearish But Put Option PUT Option: “Buyer” of a Put Option on a particular Stock “gets the right to Sell” the underlying Stock. Example: suppose you bought a put option of 2.

6000 per lot 5 58 ..e.Result: The put option appreciated to Rs. i.strike price -premium paid MAXIMUM PROFIT: Unlimited MAXIMUM LOSS: Rs. A graphical representation of this strategy position is given below BREAK EVEN POINT: 3780.134 as the index fell and we sold off the position resulting in a profit.

A graphical representation of this strategy position is given below 5 59 . Also the stock is trading in a oversold zone. Short Call: Initiated on 28 April Spot Price: Rs . This would be detrimental for the cement sector.1020/- Strategy: Sold ACC 1050 May CA @ Rs.3) Strategies you use when market view is bearish to stagnant Stock: ACC Outlook: Bearish to stagnant Strategy: SHORT (Sell) CALL Rationale: The government has imposed a cut in the import duty on cement. We therefore kept the premium that we collected which was our net profit.20 (Lot size = 375) Result: Our conviction was right and cement stocks trended downwards.

90) as the stock went down and this resulted in a loss of Rs. 2. Short Put: Initiated on 9th Apr Spot Price:Rs .. BREAK EVEN POINT: Rs. Strike price . A graphical representation of this strategy is given below.50 (Lot size = 2700) Result: This is one example where our strategy resulted in a loss. Our outlook was wrong and SAIL stock fell along with the general market.e.1070.40 per lot. 6 60 . i.1. strike price + premium received MAXIMUM PROFIT: Premium received MAXIMUM LOSS: Unlimited 4) Strategies you use when market view is bullish to stagnant : Stock: SAIL Outlook: Bullish to stagnant Strategy: SHORT (Sell) PUT Rationale: The stock is trading in a oversold zone along with massive increase in the open interest in call options of strike prices in 115 & 118.3.114/Strategy: Sold SAIL 110 April PA @ Rs.We had to buy back our put at a higher price (at Rs.BREAK EVEN POINT: Rs.Premium received MAXIMUM PROFIT: Premium received MAXIMUM LOSS: Unlimited.50. 107.

BREAK EVEN POINTS: 4300.5) Strategies you use when the stock is expected to move far enough in either direction in the short-term Index: NIFTY Outlook: Highly Volatile Strategy: LONG STRADDLE (Buy an equal number of calls and puts of the same strike price and same expiry) Rationale: Due to global markets the NIFTY Index is expected to volatile Long Straddle: Initiated on 1st May Spot Value: 4090 levels Strategy: Buy NIFTY 4100 May CA @ Rs..e. strike price + premiums paid 6 61 . This strategy is profitable if NIFTY is above 4300 or below 3900.110 (Lot size = 50) Result: NIFTY broke the crucial support level of 4050 and trended downward to 3800 levels.90 (Lot size = 50) Buy NIFTY 4100 May PA @ Rs. The put option was profitable and the call option expired worthless resulting in a net profit. i.

strike price – premiums paid MAXIMUM PROFIT: Unlimited MAXIMUM LOSS: Total premium amount paid 6) Strategy to be used when market is stagnant to range-bound: Index: Outlook: Strategy: NIFTY Stagnant to range-bound SHORT (Sell) STRADDLE (Sell an equal number of calls and puts of the same strike price and same expiry) Rationale: The market is expected to be in a consolidation phase for the next 10-15 trading sessions.40 (Lot size = 50) Result: NIFTY stayed range bound between 4050 and 3850 resulting in a net profit.. Premiums received put and call options were retained. i. for both Short Straddle: Initiated on 10th April View: Range bound and stabilizing Spot Value: 3970 levels Strategy: Sell NIFTY 3950 April CA @ Rs. A graphical representation of this strategy is given below 6 62 .e.60 (Lot size = 50) Sell NIFTY 3950 April PA @ Rs.3900.

We therefore realized a net profit of Rs.10 (Lot size = 675) Buy TISCO Feb 450 PA @ Rs. after the Corus deal TISCO stock took a hit and spiraled all the way down to 450 levels where we sold off the put for Rs. Long Strangle: Spot Price: Strategy: Initiated on 23rd Jan 470 levels Buy TISCO Feb 500 CA @ Rs.e.28. strike price – premiums paid MAXIMUM PROFIT: Limited to the premiums received MAXIMUM LOSS: Unlimited 7) Strategy to be used when market is highly volatile : Stock: TISCO Outlook: Highly Volatile Strategy: LONG (Buy) STRANGLE (Buy an equal number of calls and puts at different strike prices and same expiry) Rationale: The stock could respond either way with high volatility due to the Corus takeover. 6 63 .15 per lot. strike price + premiums paid 3850.7.BREAK EVEN POINTS: 4050. i.. i..e.10 (Lot size = 675) Result: TISCO stock responded positively to this strategy and rallied to 510-520 levels where we cleared our call and sold it at Rs. Now.

.e. i. i. Example: Spot Price: Strategy: ITC Short Strangle 170 levels Sell ITC 180 Mar CA @ Rs. lower strike price – premiums paid MAXIMUM PROFIT: Unlimited MAXIMUM LOSS: Total premium amount paid 8) Strategy to be adopted when market outlook is stagnant to range-bound: Stock: ITC Outlook: Stagnant to range-bound Strategy: SHORT (Sell) STRANGLE (Sell an equal number of calls and puts at different strike prices and same expiry) Rationale: ITC has been trading in a range of 160180 for quite sometime and we expect it continue trading in the same consolidation range.7 (Lot size = 675) Result: ITC remained range-bound and the premiums collected were realized as net profit.BREAK EVEN POINTS: 520.e.. upper strike price + premiums paid 6 64 . upper strike price + premiums paid 430.4 (Lot size = 675) Sell ITC 160 Mar PA @ Rs.e. i. BREAK EVEN POINTS: 191..

e. hence resulting in a net profit of Rs. A graphical representation of this strategy is given below suggesting Result: 6 65 .21 per lot.Technical indicators are strong upward move in SBIN with strong resistance at 1230-1250 levels. Bull Spread: Spot Price: Strategy: Initiated on 31st Mar Rs .42 (Lot size = 250) Sell SBI 1230 April CA @ Rs. SBI rallied higher and we realized a net profit in this strategy.. We sold the 1140 call for Rs. i. lower strike price – premiums paid MAXIMUM PROFIT: Limited to the premiums received MAXIMUM LOSS: Unlimited 9) Strategy to be used when the market is moderately bullish Stock: Outlook: Strategy: SBIN Moderately Bullish BULL SPREAD (Buy a call and sell a call at a higher strike) Rationale: The overall banking sector is looking attractive for buying.32.1140/Buy SBI 1140 April CA @ Rs.149.10 (Lot size = 250) After executing this strategy.85 and bought back the 1230 call for Rs.

We sold the 4100 put for Rs.8000 per lot (250 x 32) 10) Strategy to be used when market is moderately bearish Index: Outlook: Strategy: Rationale: Bear Spread: Spot Value: Strategy: Result: resulting in NIFTY Moderately Bearish BEAR SPREAD (Buy a put and sell a put at a lower strike) The short term trend for the NIFTY Index is down & it finds strong support around 4000 levels.1172 (Lower Strike + Net debit) MAXIMUM PROFIT: Rs.500 per lot (250 x 58) MAXIMUM LOSS: Rs.29 per lot.104 and bought back the 4000 put for Rs.52 (Lot size = 50) Sell NIFTY April 4000 PE @ Rs. a net profit of Rs.14.51. A graphical representation of this option position is given below 6 66 . Initiated on 12th Mar 4100 levels Buy NIFTY April 4100 PE @ Rs.BREAK EVEN POINT:Rs.28 (Lot size = 50) Nifty headed lower after this strategy and the puts increased in value.

1200 per lot (50 x 24). the 1440 call was bought back at Rs. Nifty above 4100 11) Strategy to be used when market is mildly bullish Stock: RELIANCE Outlook: Mildly Bullish Strategy: BULL CALL RATIO SPREAD (Buy a call and sell/three two higher strike calls) Rationale: The overall market is positive and RELIANCE is trading at its 50% retracement levels and may show an upward move with resistance at 1440 and 1470.1360 levels Buy RIL Mar 1380 CA @ Rs. Nifty below 4000 MAXIMUM LOSS: Rs.10 (Lot size = 150) Result: Reliance rallied to levels most profitable for this strategy. Bull Call Ratio Spread: View: Spot Price: Strategy: Initiated on 31st feb Moderately Bullish on Reliance Rs.35 per lot.35 (Lot size = 150) Sell RIL Mar 1440 CA @ Rs.2 resulting in a net profit of Rs.4076 (Upper strike – Net Debit) MAXIMUM PROFIT: Rs.3800 per lot (50 x 76).10 and the 1470 call was bought back at Rs. When reliance was at 1420 levels profits on the 1380 call were booked at Rs. 6 67 .57.15 (Lot size = 150) Sell RIL Mar 1470 CA @ Rs.BREAK EVEN POINT:Rs.

60 (Lot size = 100) Sell INFOSYSTECH Mar 2190 PA @ Rs. net profit was made for this trade. 1500 on the downside & Unlimited above 1520 12) Strategy to be used when market is mildly bearish Stock: Outlook: Strategy: Rationale: EXAMPLE: Spot Price: Strategy: Result: INFOSYSTCH Mildly Bearish Bear Put Ratio Spread (Buy a put and sell/three lower strike puts) The strategy acts as a hedge upto the level of 2100 in INFOSYSTCH.5000 per lot MAXIMUM LOSS: Unlimited below 2110 6 68 .BREAK EVEN POINT: MAXIMUM PROFIT: MAXIMUM LOSS: 1390 & 1520 Rs. Infosys Tech Bear Put Ratio Spread Rs. BREAK EVEN POINT: 2110 MAXIMUM PROFIT: Rs.30 (Lot size = 100) Infosys Tech trended downwards and the 2230 put was profitable.2240 levels Buy INFOSYSTECH Mar 2230 PA @ Rs. After clearing out all positions.40 (Lot size = 100) Sell INFOSYSTECH Mar 2160 PA @ Rs. 7500 per spread Rs.

The stock came down to 140 levels but our loss was limited only to Rs.40 (Lot size = 1595) Result: Hindalco stock was dented as a result of the Novelis takeover. and buy a put) Rationale: The momentum in stock is good along with positive movement in the RSI.2.7. Our loss was limited because of the protective put. without which we would have incurred huge losses.13) Strategy to be used when market is moderately bullish Stock: Outlook: Strategy: HINDALCO Moderately Bullish PROTECTIVE PUT (Own stock/futures. EXAMPLE: HINDALCO Protective Put Spot Price: 180 levels Strategy: Buy HINDALCO futures @ 185 levels (Lot size = 1595) Buy HINDALCO Feb 180 PA @ Rs. The put option appreciated to Rs. Technically the stock is bullish with a target price of 190-195. 6 69 .40 per contract.40 and the futures closed at 140 levels during expiry.

187. EXAMPLE: Spot Value: Strategy: NIFTY Protective call 3990 levels Sell NIFTY futures @ 3980 levels Buy NIFTY 4100 Mar CA @Rs.40 MAXIMUM PROFIT: Unlimited MAXIMUM LOSS: Rs.BREAK EVEN POINT: Rs.7.40 per lot 14) Strategy to be used when market view is moderately bearish : Index: Outlook: Strategy: NIFTY Moderately bearish PROTECTIVE CALL (Sell futures and buy a call) Rationale: Technically the Index is looking weak. The Union Budget will be a major trigger for deciding the trend of NIFTY. Note that we bought the call to protect ourselves from excessive losses if the Nifty index went up. BREAK EVEN POINT: 3890 7 70 .70 Result: Nifty trended downwards and our futures position appreciated in value.

MAXIMUM PROFIT: Unlimited MAXIMUM LOSS: 5. RECOMMENDATIONS 7 71 .

So most of the share broking firms are trying to grab new customers in derivatives as well as to retain the old ones. so this requires fine ad favourable brokerage charges as well as excellent service to their customers and they have a separate desk for formulating or using equity derivatives 2) Broking firms should shift from Equity research to Derivatives research to be able to compete with the foreign broking house when FDI in retail broking opens for these foreign players 3) Few dealers are not professionally qualified to understand strategies to play on behalf of their clients.RECOMMENDATIONS Major findings: 1) Due to more transparency and new policies implemented by SEBI players in this market is increasing at a very high rate and the new comers are well-equipped to compete with others. This leads to reduction in the cliental base be it institutional or broking. 4) During the recent market trend (where sensex has witnessed correction of 1500 points and nifty by 800 points) the broking houses successfully employed these strategies and this was a huge benefit for its clients 7 72 .

2) Proper training has to be conducted for the dealers on time to time basis to make them more knowledgeable and efficient to properly deal with the clients. chota sensex ( 5 lot size) etc.Recommendations: 1) The broking houses needs to recruit few more Derivatives analysts in their research department to cope with the growth in Derivatives segment. 6) Reducing margins for easier access to f&o rather than heavy margins at present 7) SEBI should consider longer expiration contracts like 6 months expiry to 3 years expiry contracts 7 73 . And to give proper advice in market crashes 3) Broking houses should have specialty software package to deal with Derivatives strategies at all levels of the firm even to the dealers so they can employ these strategies 4) Making the importance of derivatives understandable to retail clients by organizing investor camps 5) Bringing in more small size contracts for retail public to hedge their positions like mini nifty (20 lot size) .

8) Derivatives are weapons of mass destruction as said by millionaire investor Warren Buffet so only an professional should be employing these derivatives strategies 9) Derivatives lot sizes on individual scrips should be reduced to mini contracts from existing contract sizes . 6. CONCLUSION 7 74 .

going by the indicators available and the signals for the future. the nature and settlement of trade. who will be able to trade and speculate better than in the cash market 7 75 . The growth of Derivatives as a mass trading technique in the country is unstoppable. and the profile of market participants. I personally don’t think many of our colleagues in the business have really understood the impact that Derivatives can have on the broking business. One should avoid using derivatives in a very volatile market that would magnify the losses to a greater extent as we buy or sell in lot sizes and should use proper strategies required in a volatile market and derivatives trading will soon surpass the daily turnover in the cash segment in both BSE and NSE currently derivatives trading is dominated by NSE in terms of turnover .CONCLUSION Derivatives as a risk management tool should be employed after understanding the risk profile of yourelf or your clients or it will lead to increased risk if not used at the right time or without understanding the market trend. When retail broking space is opened to FDI we will be able to see more use of complex derivatives product available in the market in India which is currently not available Then we will be able to see retail public trading more in the derivatives segment than the institutional trading which holds a majority of the chunk in the Derivatives trading segment in India. When it ultimately gathers momentum. The advent of Derivatives trading in the country will change the face of the Indian capital market very soon in terms of the volume of transactions. the biggest beneficiary will be the traders and speculators.

ANNEXURE 7 76 . Warren Buffet. 7.With Derivatives one needs to apply common sense and take small positions in the market rather than taking exuberant positions and losing the entire capital deployed in the F&O segment “DERIVATIVES ARE TO BE VIEWED AS WEAPONS OF MASS DESTRUCTION” as said by the great investor of all times Mr.

the concept of derivatives comes into the picture. static.1 THESIS SYNOPSIS NAME: Reuben Davis. THESIS EXTERNAL GUIDE: Mr.43538048 EMAIL ID: r9reuben@gmail.com RESEARCH AREA: Equity market TITLE OF THE THESIS: Formulating the use of derivative strategies in equity market. And which strategies to use in growing. LITERATURE RELATING TO THE PROBLEM IN BRIEF: Given the importance of derivatives in an emerging market like India it is no wonder that share broking firms are investing heavily in building up infrastructure and mining up 7 77 .7. and investors lost heavily because most of these investors did not hedge their risks by using equity derivatives. During last year in the month of may stock market saw an historic crash. declining market. To reduce this risk.J BATCH: PGP/FW/05-07/FINANCE/61 SPECIALIZATION: Finance & Marketing CONTACT NUMBER: 9833320959. by nature.Bhaskar reddy (external faculty iipm) PROBLEM DEFINITION: Financial markets are. extremely volatile and hence the risk factor is an important concern for financial agents.

Financial institutions. 7 78 .Large retailers. The dealings of the firm with its client investors will properly observed and studied in detail. Brokers who use these derivative strategies or use them on behalf of their clients. Indian stock market is also act in line with performance of the overseas markets.Questionnaire survey. Banks. NCFM guide to Derivatives. SECONDARY RESEARCH: Books. JUSTIFICATION: Few dealers are not professionally qualified to understand strategies to play on behalf of their clients. large retailers. RESEARCH METHODOLOGY: PRIMARY RESEARCH: A channel of network that involves independent .cliental base to increase market share. SCOPE OF THE STUDY: A channel of network that involves independent F&O Experts.Also dealing room operations. . web materials. HNI’s. . By having a more practical knowledge on how to use these derivative strategies. they will benefit from it. Brokers who use these derivative strategies or use them on behalf of their clients. HNI’s. Now as the market is showing a recovery trend there is an ample opportunity to the investors to take proper strategies to play in the market. recent market trend clearly gives an indication. This leads to reduction in the cliental base. Financial institutions. The latest trend in the market shows retail investors are responding in line with the institutional investors which requires efficient traders to make them understand about the F&O strategies. Banks. where proper derivative strategies could have saved investors from huge losses.

SAMPLING METHODOLOGY: SAMPLE SIZE: Large retailers-10 Financial institutions-10 Banks-10 HNI’s-2 Brokers-8 F&O experts-10 TOTAL SAMPLE SIZE-50 7.2 RESPONSE SHEETS RESPONSE SHEET – 1 1) Name: J.REUBEN DAVIS 2) ID Number: FW/00423/Fin 3) The Topic of the study: Formulation of strategies in the use of Derivatives in Equity market 4) Date when the Guide was consulted: February 17th 5) The outcome of the discussion: Discussed about questionnaire and sample audience and insight in the Derivatives market 6) The Progress of the Thesis: Preparation of the thesis questionnaire on and collection of primary data 7 79 .

RESPONSE SHEET – 2 1) Name: J.REUBEN DAVIS 2) ID Number: FW/00423/Fin 3) The Topic of the study: Formulation of strategies in the use of Derivatives in Equity market 4) Date when the Guide was consulted: June 26 5) The outcome of the discussion: Feedback about questionnaire and materials about the basic study 6) The Progress of the Thesis: Finished Questionnaire and collecting secondary data 8 80 .

REUBEN DAVIS 2) ID Number: FW/00423/Fin 3) The Topic of the study: Formulation of strategies in the use of Derivatives in Equity market 4) Date when the Guide was consulted: August 9th 5) The outcome of the discussion: Feedback about analysis & interpretation 6) The Progress of the Thesis: Finished analysis and interpretation 8 81 .RESPONSE SHEET – 3 1) Name: J.

8 82 .REUBEN DAVIS 2) ID Number: FW/00423/Fin 3) The Topic of the study: Formulation of strategies in the use of Derivatives in Equity market 4) Date when the Guide was consulted: August 23 5) The outcome of the discussion: Feedback on recommendations and findings 6) The Progress of the Thesis: Finished recommendations now working on conclusion.RESPONSE SHEET – 4 1) Name: J.

RESPONSE SHEET – 5 1) Name: J.REUBEN DAVIS 2) ID Number: FW/00423/Fin 3) The Topic of the study: Formulation of strategies in the use of Derivatives in Equity market 4) Date when the Guide was consulted: September 20th 5) The outcome of the discussion: Feedback on project content and final additions and deletions 6) The Progress of the Thesis: Finished thesis related work now working on presentations of final thesis 8 83 .

RESPONSE SHEET – 6 1) Name: J.bibliography of final thesis 8 84 .REUBEN DAVIS 2) ID Number: FW/00423/Fin 3) The Topic of the study: Formulation of strategies in the use of Derivatives in Equity market 4) Date when the Guide was consulted: October 1st 5) The outcome of the discussion: Feedback on final additions and deletions 6) The Progress of the Thesis: Finished thesis related work now working on annexure.

7.2 QUESTIONAIRE 8 85 .

Formulating the use of Derivative Strategies in Equity market Name: Designation: Company: 1) What Strategies you normally use when market view is highly bullish? Would you always hedge your cash positions or will you be speculative and use naked positions when highly bullish on the market? a) Buy call b) Sell put c) Buy futures Reasons : _______________________________________________________________ _______________________________________________________________ 2) What Strategies you use when market view is highly bearish? Would you hedge your positions by shorting in F&O Segment or hold till markets turn in your favour? a) Buy put b) Sell call c) Sell futures Reasons : _______________________________________________________________ _______________________________________________________________ 3) What Strategies you use when market view is mildly bullish? To maximize your returns in a range bound market would you use Derivatives to maximize returns ? a) Bull Spread b) Bull Call Ratio Spread Reasons : 8 86 .

_______________________________________________________________ _______________________________________________________________ 4) What Strategies you use when market view is mildly bearish? To minimize your losses would you use Derivatives to minimize losses? a) Bear Spread b) Bear Call Ratio Spread Reasons : ______________________________________________________ _______________________________________________________________ _______________________________________________________________ _________ 5) What strategies you use when the stock is expected to move far enough in either direction in the short-term? Would you venture into Derivatives in a highly rangebound market? If Yes Give Reasons a) Buy Straddle Reasons:__________________________________________________________ _______________________________________________________________ ____________________________________________________________ 6) What strategies you use when the stock is expected to move far enough from the Predefined range? Would you venture into Derivatives in a highly volatile market? If Yes Give Reasons a) Buy Strangle Reasons:_______________________________________________________ _______________________________________________________________ _______________________________________________________________ 7) What strategies when the stock price is expected to fluctuate in a narrow range.? Would you venture into Derivatives in a highly range-bound market? If Yes Give Reasons? a) Buy Butterfly Reasons:_______________________________________________________ _______________________________________________________________ _______________________________________________________________ 8) What strategies when the stock price are expected to move substantially? Would you venture into Derivatives in a highly volatile market? If Yes Give Reasons? 8 87 .

a) Sell Butterfly Reasons:_______________________________________________________ _______________________________________________________________ _______________________________________________________________ 9) When to use Bull call ratio spread? Under which market conditions to use? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 10) When to use Bear call ratio spread? Under which market conditions to use? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 8 88 .

3 BIBLIOGRAPHY 8 89 .7.

numa.wikipedia.com www.com www.com 9 90 .com Ncfm Book on Derivatives Demystifying Derivatives – Sharekhan www.com www.karvy.htm www.BIBLIOGRAPHY www.zealllc.nseindia.bseindia.com/articles/baringsdebacle.