SUMMER INTERNSHIP TRAINING

PROJECT REPORT

G.H.PATEL POSTGRADUATE INSTITUTE

BUSINESS MANAGEMENT

STUDY OF DERIVATIVE MARKET AND VARIOUS STRATEGIES

OF FUTURE AND OPTION TRADING

NC WEALTH CORPORATION

Submitted by:-
RAHUL PAMBHAR
19094
MBA ( 2019-21)
Certificate
 Declaration

I humbly declare that this report is based on the work,

carried by me and no part of it has been presented previously
for any higher degree. The report was conducted in G. H.
Patel institute of business management under the guidance
of Dr. Yogesh c. Joshi Director of GHPIBM .It is also declared
that this report has been prepared for academic purpose
alone and has not been/will not be submitted elsewhere for
any other purposes.

Date : Rahul Pambhar

(19094)
MBA(2019-21)
 Preface

“Sound becomes music, if trained person

uses it.” The above proverb itself tells about
the significance of the industrial training with
the theoretical knowledge in the field of
management in order to become of
management. “The student of today shall be
the entrepreneur of tomorrow.” With this
minimum in mind, the students are trained for
practical study by development program by
study in syllabus.
these factors in mind the students are
required to prepare an summer internship
training project report. In this regard, I have
prepared summer internship industrial project
report on "STUDY OF DERIVATIVE MARKET AND
VARIOUS STRATEGIES OF FUTURE AND OPTION
TRADING"

What I learnt from NC wealth corporation during internship this

is presented in thebest possible manner and to the best of
mobility.
 Acknowledgement

It is great pleasure for me to acknowledge the kind of help and guidance received to
meduring my project work. I was fortunate enough to get support from a large number of
people to whom I shall always remain grateful.

I would like to express my sincere gratitude to Mr. Nishant Chauhan and Miss. Jagruti Gusai
for giving me this opportunity to undergo this lucrative project with NC Wealth Corporation.
and also for their great guidance and advice on this project, without which I will not be able
to complete this project.

I am very thankful to Dr. Yogesh c.Joshi and for his inspiration and for initiating diligent
efforts and expert guidance in course of my study and completion of the project and I am
very thankful to my project guide for giving me timely and concrete guidance for making this
project successful.

I would like to thankful to customers and staff members of NC Wealth Corporation For
helped me during the project report and providing me more and more valuable information
for my project report.

I would thanks to God for their blessing and my Parents also for their valuable suggestion
and support in my project report.

I would also like to express my deep sense of gratitude towards managers, staff, & to all
those who directly or indirectly helped me in successfully execution of my work.

Rahul Pambhar

Table of Contents / Index

Sr. No. Topic Page
Number

CHAPTER :-1
INTRODUCTION

1.1 INDUSTRY PROFILE

 INTRODUCTION TO DERIVATIVE

The origin of derivatives can be traced back to the need of farmers to protect
themselves against fluctuations in the price of their crop. From the time it was sown to the
time it was ready for harvest, farmers would face price uncertainty. Through the use of
simple derivative products, it was possible for the farmer to partially or fully transfer price
risks by locking-in asset prices. These were simple contracts developed to meet the needs
of farmers and were basically a means of reducing risk.

A farmer who sowed his crop in June faced uncertainty over the price he would
receive for his harvest in September. In years of scarcity, he would probably obtain attractive
prices. However, during times of oversupply, he would have to dispose off his harvest at a
very low price. Clearly this meant that the farmer and his family were exposed to a high risk
of price uncertainty.

On the other hand, a merchant with an ongoing requirement of grains too would face
a price risk that of having to pay exorbitant prices during dearth, although favourable prices
could be obtained during periods of oversupply. Under such circumstances, it clearly made
sense for the farmer and the merchant to come together and enter into contract whereby the
price of the grain to be delivered in September could be decided earlier. What they would
then negotiate happened to be futures-type contract, which would enable both parties to
eliminate the price risk.

In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and
merchants together. A group of traders got together and created the ‘to-arrive’ contract that
permitted farmers to lock into price upfront and deliver the grain later. These to-arrive
contracts proved useful as a device for hedging and speculation on price charges. These
were eventually standardized, and in 1925 the first futures clearing house came into
existence.

Today derivatives contracts exist on variety of commodities such as corn, pepper,

cotton, wheat, silver etc. Besides commodities, derivatives contracts also exist on a lot of
financial underlying like stocks, interest rate, exchange rate, etc.
DERIVATIVE DEFINED

A derivative is a product whose value is derived from the value of one or more
underlying variables or assets in a contractual manner. The underlying asset can be equity,
forex, commodity or any other asset. In our earlier discussion, we saw that wheat farmers
may wish to sell their harvest at a future date to eliminate the risk of change in price by that
date. Such a transaction is an example of a derivative. The price of this derivative is driven
by the spot price of wheat which is the “underlying” in this case.

The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures

contracts in commodities all over India. As per this the Forward Markets Commission (FMC)
continues to have jurisdiction over commodity futures contracts. However when derivatives
trading in securities was introduced in 2001, the term “security” in the Securities Contracts
(Regulation) Act, 1956 (SCRA), was amended to include derivative contracts in securities.
Consequently, regulation of derivatives came under the purview of Securities Exchange
Board of India (SEBI). We thus have separate regulatory authorities for securities and
commodity derivative markets.

Derivatives are securities under the SCRA and hence the trading of derivatives is
governed by the regulatory framework under the SCRA. The Securities Contracts
(Regulation) Act, 1956 defines “derivative” to include-

A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract differences or any other form of security.

A contract which derives its value from the prices, or index of prices, of underlying securities.

TYPES OF DERIVATIVES MARKET

Exchange Traded Derivatives Over The Counter Derivatives

 National Stock Bombay Stock National Commodity &

Exchange Exchange Derivative Exchange

Index Future Index option Stock option Stock

future

Figure.1 Types of Derivatives Market

TYPES OF DERIVATIVES

Swaps

Type of
Option derivatives
Forward

Future

Figure.2 Types of Derivatives

1.FORWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for a

specified price. One of the parties to the contract assumes a long position and agrees to
buy the underlying asset on a certain specified future date for a certain specified
price. The other party assumes a short position and agrees to sell the asset on the
same date for the same price. Other contract details like delivery date, price and
quantity are negotiated bilaterally by the parties to the contract. The forward
contracts are n o r m a l l y traded outside the exchanges.

 BASIC FEATURES OF FORWARD CONTRACT

• They are bilateral contracts and hence exposed to counter-party risk.

• Each contract is custom designed, and hence is unique in terms of contract

size, expiration date and the asset type and quality.

• The contract price is generally not available in public domain.

• On the expiration date, the contract has to be settled by delivery of the

asset.

• If the party wishes to reverse the contract, it has to compulsorily go to the same
counter-party, which often results in high prices being charged.

However forward contracts in certain markets have become very

standardized, as in the case of foreign exchange, thereby reducing
transaction costs and increasing transactions volume. This process of
standardization reaches its limit in the organized futures market. Forward
contracts are often confused with futures contracts. The confusion is primarily
because both serve essentially t h e same economic fun ct ion s of allocating
risk in the presence of future price uncertainty. However futures are a significant
improvement over the forward contracts as they eliminate counterparty risk
and offer more liquidity.

2.FUTURE CONTRACT

In finance, a futures contract is a standardized contract, traded on a futures

exchange, to buy or sell a certain underlying instrument at a certain date in the
future, at a pre-set price. The future date is called the delivery date or final
settlement date. The pre-set price is called the futures price. The price of the
underlying asset on the delivery date is called the settlement price. The settlement
price, normally, converges towards the futures price on the delivery date.

A futures contract gives the holder the right and the obligation to buy or sell, which
differs from an options contract, which gives the buyer the right, but not the
obligation, and the option writer (seller) the obligation, but not the right. To exit the
commitment, the holder of a futures position has to sell his long position or buy back
his short position, effectively closing out the futures position and its contract
obligations. Futures contracts are exchange traded derivatives. The exchange acts
as counterparty on all contracts, sets margin requirements, etc.

 BASIC FEATURES OF FUTURE CONTRACT

A) Standardization:
Futures contracts ensure their liquidity by being highly standardized, usually by
specifying:

The underlying. This can be anything from a barrel of sweet crude oil to a short term interest
rate.

The type of settlement, either cash settlement or physical settlement.

The amount and units of the underlying asset per contract. This can be the notional amount
of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of
the deposit over which the short term interest rate is traded, etc.

The currency in which the futures contract is quoted.

The grade of the deliverable. In case of bonds, this specifies which bonds can be delivered.
In case of physical commodities, this specifies not only the quality of the underlying goods
but also the manner and location of delivery. The delivery month.

The last trading date.

Other details such as the tick, the minimum permissible price fluctuation.
 B) Margin:

Although the value of a contract at time of trading should be zero, its price constantly
fluctuates. This renders the owner liable to adverse changes in value, and creates a
credit risk to the exchange, who always acts as counterparty. To minimize this risk,
the exchange demands that contract owners post a form of collateral, commonly
known as Margin requirements are waived or reduced in some cases for hedgers
who have physical ownership of the covered commodity or spread traders who have
offsetting contracts balancing the position.
Initial Margin: is paid by both buyer and seller. It represents the loss on that
contract, as determined by historical price changes, which is not likely to be
exceeded on a usual day's trading. It may be 5% or 10% of total contract price.
Mark to market Margin: Because a series of adverse price changes may exhaust
the initial margin, a further margin, usually called variation or maintenance margin, is
required by the exchange. This is calculated by the futures contract, i.e. agreeing on
a price at the end of each day, called the "settlement" or mark-to-market price of the
contract.
To understand the original practice, consider that a futures trader, when taking a
position, deposits money with the exchange, called a "margin". This is intended to
protect the exchange against loss. At the end of every trading day, the contract is
marked to its present market value. If the trader is on the winning side of a deal, his
contract has increased in value that day, and the exchange pays this profit into his
account. On the other hand, if he is on the losing side, the exchange will debit his
account. If he cannot pay, then the margin is used as the collateral from which the
loss is paid.

C) Settlement:

Settlement is the act of consummating the contract, and can be done in one of two
ways, as specified per type of futures contract:
Physical delivery - the amount specified of the underlying asset of the contract is
delivered by the seller of the contract to the exchange, and by the exchange to
the buyers of the contract. In practice, it occurs only on a minority of contracts.
Most are cancelled out by purchasing a covering position - that is, buying a
 contract to cancel out an earlier sale (covering a short), or selling a contract to
liquidate an earlier purchase (covering a long).
Cash settlement - a cash payment is made based on the underlying reference rate,
such as a short term interest rate index such as Euribor, or the closing value of a
stock market index. A futures contract might also opt to settle against an index
based on trade in a related spot market.
Expiry is the time when the final prices of the future are determined. For many
equity index and interest rate futures contracts, this happens on the Last Thursday of
certain trading month. On this day the t+2 futures contract becomes the t forward
contract.
DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS

FEATURE FORWARD CONTRACT FUTURE CONTRACT

Operational Traded directly between two Traded on the exchanges.

Mechanism parties (not traded on the
exchanges).

Contract Differ from trade to trade. Contracts are standardized contracts.

Specifications

Counter-party Exists. Exists. However, assumed by the

risk clearing corp., which becomes the
counter party to all the trades or
unconditionally guarantees their
settlement.

Liquidation Low, as contracts are tailor High, as contracts are standardized

Profile made contracts catering to exchange traded contracts.
the needs of the needs of
the parties.

Price discovery Not efficient, as markets are Efficient, as markets are centralized and
scattered. all buyers and sellers come to a common
platform to discover the price.

Examples Currency market in India. Commodities, futures, Index Futures and

Individual stock Futures in India.
3.OPTIONS -

A derivative transaction that gives the option holder the right but not the obligation to buy or
sell the underlying asset at a price, called the strike price, during a period or on a specific
date in exchange for payment of a premium is known as ‘option’. Underlying asset refers to
any asset that is traded. The price at which the underlying is traded is called the ‘strike
price’.

There are two types of options i.e., CALL OPTION & PUT OPTION.

CALL OPTION:

A contract that gives its owner the right but not the obligation to buy an underlying asset-
stock or any financial asset, at a specified price on or before a specified date is known as a
‘Call option’. The owner makes a profit provided he sells at a higher current price and buys
at a lower future price.

PUT OPTION:

A contract that gives its owner the right but not the obligation to sell an underlying asset-
stock or any financial asset, at a specified price on or before a specified date is known as a
‘Put option’. The owner makes a profit provided he buys at a lower current price and sells at
a higher future price. Hence, no option will be exercised if the future price does not increase.

Put and calls are almost always written on equities, although occasionally preference
shares, bonds and warrants become the subject of options.
4.SWAPS -

Swaps are transactions which obligates the two parties to the contract to exchange a series
of cash flows at specified intervals known as payment or settlement dates. They can be
regarded as portfolios of forward's contracts. A contract whereby two parties agree to
exchange (swap) payments, based on some notional principle amount is called as a ‘SWAP’.
In case of swap, only the payment flows are exchanged and not the principle amount. The
two commonly used swaps are:

INTEREST RATE SWAPS:

Interest rate swaps is an arrangement by which one party agrees to exchange his series of
fixed rate interest payments to a party in exchange for his variable rate interest payments.
The fixed rate payer takes a short position in the forward contract whereas the floating rate
payer takes a long position in the forward contract.

CURRENCY SWAPS:

Currency swaps is an arrangement in which both the principle amount and the interest on
loan in one currency are swapped for the principle and the interest payments on loan in
another currency. The parties to the swap contract of currency generally hail from two
different countries. This arrangement allows the counter parties to borrow easily and cheaply
in their home currencies. Under a currency swap, cash flows to be exchanged are
determined at the spot rate at a time when swap is done. Such cash flows are supposed to
remain unaffected by subsequent changes in the exchange rates.

FINANCIAL SWAP:

Financial swaps constitute a funding technique which permit a borrower to access one
market and then exchange the liability for another type of liability. It also allows the investors
to exchange one type of asset for another type of asset with a preferred income stream.
5. OTHER KINDS OF DERIVATIVES

The other kind of derivatives, which are not, much popular are as follows:

BASKETS -

Baskets options are option on portfolio of underlying asset. Equity Index Options are most
popular form of baskets.

LEAPS -

Normally option contracts are for a period of 1 to 12 months. However, exchange

may introduce option contracts with a maturity period of 2-3 years. These long-term option
contracts are popularly known as Leaps or Long term Equity Anticipation Securities.

WARRANTS -

Options generally have lives of up to one year, the majority of options traded on options
exchanges having a maximum maturity of nine months. Longer-dated options are called
warrants and are generally traded over-the-counter.

SWAPTIONS -
Swaptions are options to buy or sell a swap that will become operative at the expiry of the
options. Thus a swaption is an option on a forward swap. Rather than have calls and puts,
the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an
option to receive fixed and pay floating. A payer swaption is an option to pay fixed and
receive floating.

HISTORY OF DERIVATIVES:

The history of derivatives is quite colourful and surprisingly a lot longer than most people
think. Forward delivery contracts, stating what is to be delivered for a fixed price at a
specified place on a specified date, existed in ancient Greece and Rome. Roman emperors
entered forward contracts to provide the masses with their supply of Egyptian grain. These
contracts were also undertaken between farmers and merchants to eliminate risk arising out
of uncertain future prices of grains. Thus, forward contracts have existed for centuries for
hedging price risk.

The first organized commodity exchange came into existence in the early
1700’s in Japan. The first formal commodities exchange, the Chicago Board of Trade
(CBOT), was formed in 1848 in the US to deal with the problem of ‘credit risk’ and to provide
centralised location to negotiate forward contracts. From ‘forward’ trading in commodities
emerged the commodity ‘futures’. The first type of futures contract was called ‘to arrive at’.
Trading in futures began on the CBOT in the 1860’s. In 1865, CBOT listed the first
‘exchange traded’ derivatives contract, known as the futures contracts. Futures trading grew
out of the need for hedging the price risk involved in many commercial operations. The
Chicago Mercantile Exchange (CME), a spin-off of CBOT, was formed in 1919, though it did
exist before in 1874 under the names of ‘Chicago Produce Exchange’ (CPE) and ‘Chicago
Egg and Butter Board’ (CEBB). The first financial futures to emerge were the currency in
1972 in the US. The first foreign currency futures were traded on May 16, 1972, on
International Monetary Market (IMM), a division of CME. The currency futures traded on the
IMM are the British Pound, the Canadian Dollar, the Japanese Yen, the Swiss Franc, the
German Mark, the Australian Dollar, and the Euro dollar. Currency futures were followed
soon by interest rate futures. Interest rate futures contracts were traded for the first time on
the CBOT on October 20, 1975. Stock index futures and options emerged in 1982. The first
stock index futures contracts were traded on Kansas City Board of Trade on February 24,
1982.The first of the several networks, which offered a trading link between two exchanges,
was formed between the Singapore International Monetary Exchange (SIMEX) and the CME
on September 7, 1984.

Options are as old as futures. Their history also dates back to ancient Greece and Rome.
Options are very popular with speculators in the tulip craze of seventeenth century Holland.
Tulips, the brightly coloured flowers, were a symbol of affluence; owing to a high demand,
tulip bulb prices shot up. Dutch growers and dealers traded in tulip bulb options. There was
so much speculation that people even mortgaged their homes and businesses. These
speculators were wiped out when the tulip craze collapsed in 1637 as there was no
mechanism to guarantee the performance of the option terms.

The first call and put options were invented by an American financier,
Russell Sage, in 1872. These options were traded over the counter. Agricultural
commodities options were traded in the nineteenth century in England and the US. Options
on shares were available in the US on the over the counter (OTC) market only until 1973
without much knowledge of valuation. A group of firms known as Put and Call brokers and
Dealer’s Association was set up in early 1900’s to provide a mechanism for bringing buyers
and sellers together.

On April 26, 1973, the Chicago Board options Exchange (CBOE) was set
up at CBOT for the purpose of trading stock options. It was in 1973 again that black, Merton,
and Scholes invented the famous Black-Scholes Option Formula. This model helped in
assessing the fair price of an option which led to an increased interest in trading of options.
With the options markets becoming increasingly popular, the American Stock Exchange
(AMEX) and the Philadelphia Stock Exchange (PHLX) began trading in options in 1975.

The market for futures and options grew at a rapid pace in the eighties and nineties. The
collapse of the Bretton Woods regime of fixed parties and the introduction of floating rates
for currencies in the international financial markets paved the way for development of a
number of financial derivatives which served as effective risk management tools to cope with
market uncertainties.
The CBOT and the CME are two largest financial exchanges in the world on which futures
contracts are traded. The CBOT now offers 48 futures and option contracts (with the annual
volume at more than 211 million in 2001).The CBOE is the largest exchange for trading
stock options. The CBOE trades options on the S&P 100 and the S&P 500 stock indices.
The Philadelphia Stock Exchange is the premier exchange for trading foreign options.

The most traded stock indices include S&P 500, the Dow Jones Industrial Average,
the Nasdaq 100, and the Nikkei 225. The US indices and the Nikkei 225 trade almost round
the clock. The N225 is also traded on the Chicago Mercantile Exchange.

Risks involved in Derivatives:

Derivatives are used to separate risks from traditional instruments and transfer these

risks to parties willing to bear these risks. The fundamental risks involved in derivative

business includes

Credit Risk: This is the risk of failure of a counterpart to perform its obligation as per the

contract. Also known as default or counterpart risk, it differs with different instruments.

Market Risk: Market risk is a risk of financial loss as result of adverse movements of prices

of the underlying asset/instrument.

Liquidity Risk: The inability of a firm to arrange a transaction at prevailing market prices is

termed as liquidity risk. A firm faces two types of liquidity risks:

Related to liquidity of separate products.

Related to the funding of activities of the firm including derivatives.

Legal Risk: Derivatives cut across judicial boundaries, therefore the legal aspects associated

with

The deal should be looked into carefully.

MAJOR PLAYERS IN DERIVATIVE MARKET:

There are three major players in their derivatives trading.

Hedgers.

Speculators.

Arbitrageurs.

Hedgers: The party, which manages the risk, is known as “Hedger”. Hedgers seek to

protect themselves against price changes in a commodity in which they have an interest.

Speculators: They are traders with a view and objective of making profits. They are willing

to take risks and they but upon whether the markets would go up or come down.

Arbitrageurs: Risk less profit making is the prime goal of arbitrageurs. They could be

making money even with out putting their own money in, and such opportunities often come

up in the market but last for very short time frames. They are specialized in making

purchases and sales in different markets at the same time and profits by the difference in

prices between the two centres.

 1.2 Objective of the project

Objective of the project :-

• To study and understand the concept of “derivatives market.”

• The study analyzes the various strategies of derivatives market segment.
• To study trading segment “derivatives market.”
• To study how and why to invest
• To analyze the available data i.e. fact and figures affecting investment.
• To analyze and interpret the data i.e. strategies.
• To identify the factors of Future and Options.
• Find out Misconceptions about Derivatives and View to overcome them.

1.3 SCOPE OF THE STUDY

• The scope of the study is limited to “DERIVATIVES” with the special reference

to Indian context and the National stock exchange has been taken as a

representative sample for the study. The study includes futures and options.

• My analysis part is limited to selecting the investment option it means that

whether we have to invest cash market or derivatives market.

• I have taken only four different organizations from four different industries to

analyze and interpret the results.

• Based upon four criteria’s only open interest is evaluated for analyzing the trend

of market as well as price movement.

• The study is not Based on the international perspective of derivatives markets,

which exists in NASDAQ, CBOT etc.

• This study mainly covers the area of hedging and speculation. The main aim of

the study is to prove how risks in investing in equity shares can be reduced and

how to make maximum return to the other investment.

1.4 STATEMENT OF THE PROBLEM

 The main problem in the derivatives is we can’t able to decide that time and

derivative product which is more risky and return depend upon the time and product only we

can earn more returns with taking more risk. In this following project I came to know that

based upon some valuations and time conditions we can easily identify that which product is

more efficient for earning more returns. In this research I used only two derivative products

they are FUTURES and OPTIONS. Another one is OPEN INTEREST concept it is very new

to market. This additional work proposes based upon open interest and volume we can tell

the when the market is bullish as well as bearish and identifies that price movements easily

when they are going to rise and when they are coming fall depends upon price volume

changes.

1.5 LIMITATIONS

Share market is so much volatile and it is difficult to forecast any thing about it whether you

trade through online or offline

The time available to conduct the study was only 2 ½ months. It being a wide topic had a

limited time.

1.6 RESEARCH METHODOLOGY & DESIGN

 Research Methodology is a systematic procedure of collecting information in order to

analyse and verify a phenomenon. the collection of information is done in two principle

sources. They are as follows

1) Primary Data

2) Secondary Data

Primary Data:

It is the information collected directly without any references. In this study it is

gathered through interviews with concerned officers and staff, either individually or

collectively, sum of the information has been verified or supplemented with personal

observation in trading times and conducting personal interviews with the concerned officers

of INDIABULLS SECURITIES LTD.

Secondary Data:

The secondary data was collected from already published sources such as, NSE

websites, internal records, reference from text books and journal relating to derivatives. The

data collection includes:

• Collection of required data from NSE and BSE websites

• Reference from text books and journals relating to Indian stock market system

and financial derivatives.

 CHAPTER :- 2

COMPANY AND PRODUCT INFORMATION

2.1 Introduction of NC’s wealth Corporation

NC INVESTMENT CORPORATION is Bhuj-Kachchh (Gujarat) based stock market broking and

advisory firm. They have got broking license from SEBI in year 2015.They are having nearly
180 clients (Includes Retail, HNI and NRI) within 2 years and manage nearly 50 Million
rupees of portfolio which is invested in various financial markets if India.

2.2 Vision

• We aspire to be unbiased broking firm not just in India but in the globe.

2.3 Mission

• Constantly working on our excellent level of unbiased research which helps our
client to get best investment prospective all the time.

• Focusing on wealth creation education initiatives on a consistence basis.

• Empowering our investors with unique investment prospective via joining hands
with domestic and global best research analyst and agencies.

2.4 Products

• D-mate accounts
• Broking and advisory
• Education Workshops
• Product details
• Wealth Club Where every month under the guidance of NC research team, clients do
stock SIP to generate long term wealth
• Private Group
• NC research cell provides short term momentum based research for swing trading
• Derivatives warriors
 • NC research team provides exculsive research for HNI Derivatives traders via
machanical system

2.5 SWOT analysis:

Strengths:

• Leadership and various teams with high level of integrity and talent.
• Best processes for investor cancelling
• Excellent level of unbiased research tie ups.
• Unique prospective fro portfolio management.
• The simplest investment practises for clients to execute trades and get most out of
it.
• Business partners of Sharekhan Pvt. Ltd, by BNP Paribas which is top Investment
banking not just in India but at globe.
• Client base from all over world.
• The brand name popularity is increasing very fast.

Weakness:

• Low level of client base compare to other ordinary broking firm.

• Lack of physical infrastructure.

Opportunities:

• Ready to grab the future equity participation rate which is going to increase rapidly
in next decade.
• Getting benefits of various education Initiatives taken by exchanges, regulators and
depository participants.
 • As Industry is shifting from more broking towards more client education, our firm is
ready to ride such trends due to our core strength.
• Technology is spreading very fast and we have business partners who can provide
high level of trading technologies such as Trade tiger, Sharekhan Mobile App. Etc.
• India is fastest growing country in the world and our stock markets will rise with this
too, so Industry itself will grow exponentially in next two decade.
• Government’s initiatives such as demonetisation, GST, reducing black economy in
the country will help our industry.
• Long term recession in Gold markets, Real estate will also help us.
• Downwards trajectory of interest rates.
• Increasing awareness about mutual funds and Systematic investment plans (SIPs) is
also encouraging signs for us.

Threats:

• Rising Interest rates and long term bear cycle in stock market.
• Bull market in Gold and real estate.
• Low cost brokerages firms which provides online platforms to trade.
• Rising number of players in Industry.

2.6 Competitors:

All broking firms such as....

• Angel Broking
• Zerodha
• 5 paisa
• Upstock
• Marwadi
• Kotak securities global
• Even all of nationalised banks and private sector banks which offer D-mate accounts
and broking.
Chapter :- 3
Analysis
3.1 INTRODUCTION TO FUTURES AND OPTIONS

A) FUTURES

A futures contract is an agreement between two parties to buy or sell an asset at a certain time
in the future at a certain price. The futures contracts are standardized and exchange traded. To
facilitate liquidity in the futures contracts, the exchange specifies certain standard features of
the contract. It is a standardized contract with standard underlying instrument, a standard
quantity and quality of the underlying instrument that can be delivered, (or which can be used
for reference purposes in settlement) and a standard timing of such settlement.

FUTURES TERMINOLOGY

Spot price: The price at which an asset trades in the spot market.

Futures price: The price at which the futures contract trades in the futures market.

Contract cycle: The period over which a contract trades. The index futures contracts on the

NSE have one- month, two-months and three months expiry cycles which expire on the last

Thursday of the month. Thus a January expiration contract expires on the last Thursday of

January and a February expiration contract ceases trading on the last Thursday of February.

On the Friday following the last Thursday, a new contract having a three- month expiry is

introduced for trading.

Expiry date: It is the date specified in the futures contract. This is the last day on which the

contract will be traded, at the end of which it will cease to exist.

Contract size: The amount of asset that has to be delivered under one contract. Also called

as lot size.

Basis: In the context of financial futures, basis can be defined as the futures price minus the

spot price. There will be a different basis for each delivery month for each contract. In a

normal market, basis will be positive. This reflects that futures prices normally exceed spot

prices.

Cost of carry: The relationship between futures prices and spot prices can be summarized in

terms of what is known as the cost of carry. This measures the storage cost plus the interest

that is paid to finance the asset less the income earned on the asset.

Initial margin: The amount that must be deposited in the margin account at the time a

futures contract is first entered into is known as initial margin.

Marking-to-market: In the futures market, at the end of each trading day, the margin

account is adjusted to reflect the investor's gain or loss depending upon the futures closing

price. This is called marking-to-market.

Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure

that the balance in the margin account never becomes negative. If the balance in the margin

account falls below the maintenance margin, the investor receives a margin call and is

expected to top up the margin account to the initial margin level before trading commences

on the next day.

TYPES OF FUTURES

On the basis of the underlying asset they derive, the futures are divided into two types:
 • Stock Future

• Futures

PARTIES IN THE FUTURES CONTRACT

There are two parties in a futures contract, the buyers and the seller. The buyer of the

futures contract is one who is LONG on the futures contract and the seller of the futures

contract is who is SHORT on the futures contract.

The pay-off for the buyers and the seller of the futures of the contracts are as follows:

(1) PAY-OFF FOR A BUYER OF FUTURES

P
Profit

E2
F
Loss E1

CASE 1:- The buyers bought the futures contract at (F); if the futures

Price Goes to E1 then the buyer gets the profit of (FP).

CASE 2:- The buyers gets loss when the futures price less then (F); if
 The Futures price goes to E2 then the buyer the loss of (FL).

(2): PAY-OFF FOR A SELLER OF

PROFIT

E2

E1 F

LOSS
P

FUTURE OF

FUTURES

F = FUTURES PRICE

E1, E2 = SATTLEMENT PRICE

CASE 1:- The seller sold the future contract at (F); if the future goes to
 E1 Then the seller gets the profit of (FP).

CASE 2:- The seller gets loss when the future price goes greater than (F);

If the future price goes to E2 then the seller get the loss of (FL).

HOW THE FUTURE MARKET WORKS

The futures market is a centralized marketplace for buyers and sellers from around the world
who meet and enter into futures contracts. Pricing can be based on an open outcry system, or
bids and offers can be matched electronically. The futures contract will state the price that
will be paid and the date of delivery. Almost all futures contracts end without the actual
physical delivery of the commodity.

B) INTRODUCTION TO OPTIONS
 In this section, we look at the next derivative product to be traded on the NSE,

namely options. Options are fundamentally different from forward and futures contracts. An

option gives the holder of the option the right to do something. The holder does not have to

exercise this right. In contrast, in a forward or futures contract, the two parties have

committed themselves to doing something. Whereas it costs nothing (except margin

requirement) to enter into a futures contracts, the purchase of an option requires as up-front

payment.

DEFINITION

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

TYPES OF OPTIONS

The Options are classified into various types on the basis of various variables. The

following are the various types of options.

❖ On the basis of the underlying asset:

On the basis of the underlying asset the option are divided in to two types:

Index options:

These options have the index as the underlying. Some options are European while

others are American. Like index futures contracts, index optionscontracts are also cash

settled.
Stock options:

Stock Options are options on individual stocks. Options currently trade on over 500

stocks in the United States. A contract gives the holder the right to buy or sell shares at the

specified price.

❖ On the basis of the market movements :

On the basis of the market movements the option are divided into two types. They are:

Call Option:

A call Option gives the holder the right but not the obligation to buy an asset by a certain

date for a certain price. It is brought by an investor when he seems that the stock price moves

upwards.

Put Option:

A put option gives the holder the right but not the obligation to sell an asset by a certain date

for a certain price. It is bought by an investor when he seems that the stock price moves

downwards.

❖ On the basis of exercise of option:

On the basis of the exercise of the Option, the options are classified into two Categories.

American Option:

American options are options that can be exercised at any time up to the expiration date.

Most exchange –traded options are American.

European Option:
European options are options that can be exercised only on the expiration date itself.

European options are easier to analyse than American options, and properties of an American

option are frequently deduced from those of its European counterpart.

(1) PAY OFF PROFILE FOR BUYER OF A CALL OPTION

The Pay-off of a buyer options depends on a spot price of an underlying asset. The

following graph shows the pay-off of buyers of a call option.

PROFIT
R

ITM

ATM E1
OTM

E2 LOSS P

Figure 3.4

S= Strike price ITM = In the Money

Sp = premium/loss ATM = At the Money

E1 = Spot price 1 OTM = Out of the Money

 E2 = Spot price 2

SR = Profit at spot price E1

CASE 1: (Spot Price > Strike price)

As the Spot price (E1) of the underlying asset is more than strike price (S).

The buyer gets profit of (SR), if price increases more than E1 then profit also increase more

than (SR)

CASE 2: (Spot Price < Strike Price)

As a spot price (E2) of the underlying asset is less than strike price (S)

The buyer gets loss of (SP); if price goes down less than E2 then also his loss is limited to his

premium (SP)

(2) PAY-OFF PROFILE FOR SELLER OF A CALL OPTION

The pay-off of seller of the call option depends on the spot price of the underlying asset. The

following graph shows the pay-off of seller of a call option:

 PROFIT

P
ITM ATM
E2

E1
S
OTM

LOSS

Figure 3.5

S= Strike price ITM = In the Money

SP = Premium / profit ATM = At The money

E1 = Spot Price 1 OTM = Out of the Money

E2 = Spot Price 2

SR = loss at spot price E2

CASE 1: (Spot price < Strike price) As the spot price (E1) of the underlying is less than strike

price (S). The seller gets the profit of (SP), if the price decreases less than E1 then also profit

of the seller does not exceed (SP).

CASE 2: (Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S) the Seller gets loss

of (SR), if price goes more than E2 then the loss of the seller also increase more than (SR).
 (3) PAY-OFF PROFILE FOR BUYER OF A PUT OPTION

The Pay-off of the buyer of the option depends on the spot price of the underlying asset. The

following graph shows the pay-off of the buyer of a call option.

PROFIT R

ITM
S E2

ATM
E1
OTM

P LOSS

Figure 3.6

S = Strike price ITM = In the Money

SP = Premium / loss ATM = At the Money

E1 = Spot price 1 OTM = Out of the Money

E2 = Spot price 2

SR = Profit at spot price E1

CASE 1: (Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S). The buyer gets the

profit (SR), if price decreases less than E1 then profit also increases more than (SR).

CASE 2: (Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S),

The buyer gets loss of (SP), if price goes more than E2 than the loss of the buyer is limited to

his premium (SP).

(4) PAY-OFF PROFILE FOR SELLER OF A PUT OPTION

The pay-off of a seller of the option depends on the spot price of the underlying asset. The

following graph shows the pay-off of seller of a put option.

PROFIT
P
ITM
E1
ATM

E2
S
OTM

LOSS

Figure 3.7

S = Strike price ITM = In the Money

 SP = Premium/profit ATM = At the Money

E1 = Spot price 1 OTM = Out of the Money

E2 = Spot price 2

SR = Loss at spot price E1

CASE 1: (Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S), the seller gets the

loss of (SR), if price decreases less than E1 than the loss also increases more than (SR).

CASE 2: (Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S), the seller gets

profit of (SP), of price goes more than E2 than the profit of seller is limited to his premium

(SP).

3.2
 3.2 Analysis on various strategies of future and option trading

DATA COLLECTION AND DATA ANALYSIS

DIFFERENT STRATEGIES IN FUTURES & OPTIONS

What are Strategies?

Strategies are specific game plans created by you based on your idea of how the market will
move. Strategies are generally combinations of various products – futures, calls and puts and
enable you to realize unlimited profits, limited profits, unlimited losses or limited losses
depending on your profit appetite and risk appetite.

How are Strategies formulated?

The simplest starting point of a Strategy could be having a clear view about the market or a script.
There could be strategies of an advanced nature that are independent of views, but it would be
correct to say that most investors create strategies based on views.

What views could be handled through Strategies?

There could be four simple views: bullish view, bearish view, volatile view and neutral view.
Bullish and bearish views are simple enough to comprehend. Volatile view is where you
believe that the market or scrip could move rapidly, but you are not clear of the direction
(whether up or down). You are however sure that the movement will be significant in one
direction or the other. Neutral view is the reverse of the Volatile view where you believe that
the market or scrip in question will not move much in any direction

A] Bullish Strategies

Various bullish strategies possible

• Buy a Future
• Buy a Call Option
• Sell a Put Option
 • Create a Bull Spread using Calls
• Create a Bull Spread using Puts

Let us discuss each of these using some examples.

Buy a Futures Contract

If you buy a Futures Contract, you will need to invest a small margin (generally 15 to 30% of the
Contract value). If the underlying index or scrip moves up, the associated Futures will also move up.
You can then gain the entire upward movement at the investment of a small margin. For example, if
you buy Nifty Futures at a price of Rs 4,100 that moves up to 4,150 in say 10 days time you gain 50
points. Now if you have invested only 20%, i.e. 820, your gain is over 6.09% in 10 days time.

The danger of the Futures value falling is very important. You should have a clear stop loss strategy
and if you’ re Nifty Futures in the above example were to fall from 4,100 to say 4,080; you should
sell out and book your losses before they mount.

The graph of a Buy Futures Strategy appears below:

Pro
fit

50

0
4050 4100 4150 Nifty

Buy a Call -50

Option
If you buy a Call Option, your Option Premium is your cost which you will pay on the day of entering
into the transaction. This is also the maximum loss that you can ever incur. If you buy a Satyam May
260 Call Option for Rs.21, the maximum loss is Rs.21. If Satyam closes above Rs.260 on the expiry
day, you will be paid the difference between the closing price and the strike price of Rs.260. For
example, if Satyam closes at Rs.300, you will get Rs.40. After setting off the cost of Rs.21, your net
profit is Rs.19.

The Call buyer has a limited loss, unlimited profit profile. No margins are applicable on the buyer.
The premium will be paid in cash upfront. If the Satyam scrip moves nowhere, the buyer is adversely
impacted. As time passes, the value of the Option will fall. Thus if Satyam is currently at around Rs
260 and remains around that price till the end of May, the value of the Option which is currently Rs
21 would have fallen to nearly zero by that time. Thus time affects the Call buyer adversely.

The graph of a Buy Call position appears below

150

100

PAY 50
OFF
0
185 220 255 290 325 360
-50

STRIKE PRICE

Sell a Put Option

Another bullish strategy is to sell a Put Option. As a Put Seller, you will receive Premium. For
example, if you sell Reliance May 300 Put Option for Rs 18; you will earn an Income of Rs 18 on the
day of the transaction. You will however face a risk that you might have to pay the difference
between 300 and the closing price of Reliance scrip on the last Thursday of May. For example, if
Reliance were to close on that day at Rs 275, you will be asked to pay Rs 25. After setting of the
Premium received of Rs 18, the net loss will be Rs 7. If on the other hand, Reliance closes above Rs
300 (as per your bullish view), the entire income of Rs 18 would belong to you.

As a Put Seller, you are required to put up Margins. These margins are calculated by the
exchange using a software program called Span. The margins are likely to be between 20 to
35% of the Contract Value. As a Put Seller, you have a limited profit, unlimited loss profile
which is a high risk strategy. If time passes and Reliance remains wherever it is (say Rs 300),
you will be very happy. Passage of time helps the Sellers as value of the Option declines over
time

The profile of the Put Seller would appear as under:

Bull Spreads
First of all, Spreads are strategies, which combine two or more Calls (or alternatively two or more
Puts). Another series of Strategies goes by the name Combinations where Calls and Puts are
combined.

Bull Spreads are those class of strategies that enable you benefit from a bullish phase on the index
or scrip in question. Bull spreads allow you to create a limited profit, limited loss model of payoff,
which you might be very comfortable with.

Bull Spread using Calls/ Puts

Bull spreads can be created using Calls or using Puts. You need to buy one Call with a lower
strike price and sell another Call with a higher strike price and a spread position is created.
Interestingly, you can also buy a Put with a lower strike price and sell another with a higher
strike price to achieve a similar payoff profile.

B ] Bearish Strategies

Various bearish strategies possible

Sell Scrip Futures

Sell Index Futures

Buy Put Option

Sell Call Option

Bear Spreads

Combinations of Options and Futures

Let us discuss each one of them now.

Sell Scrip Future or Index Futures:-

In the current Indian system, when you sell Scrip Futures, you are not required to deliver the
underlying scrip. You will be required to deposit a certain margin with the exchange on sale of Scrip
Futures. If the Scrip actually falls (as per your belief), you can buy back the Futures and make a
profit. For example, Satyam Futures are quoting at Rs 250 and you sell them today as you are
bearish. You could buy them back after 10 days at say Rs 230 (if they fall as per your expectations),
generating a profit of Rs 20. Question of delivering Satyam does not arise in the present set up.
You will be required to place a margin with the exchange which could be around 25% (an illustrative
percentage). If you accordingly place a margin of Rs 62.50, a return of Rs 20 in 10 days time works
out to a wonderful 30% plus return.

Obviously, if Satyam Futures move up (instead of down) you face an unlimited risk of losses. You
should therefore operate with a stop loss strategy and buy back Futures if they move in reverse gear.

You could adopt the same strategy with Index Futures if you are bearish on the market as a whole.
Similar returns and risks are attached to this strategy.

Buy Put Option

The Put Option will rise in value as the scrip (or index) drops. If you buy a Put Option and the scrip
falls (as you believe), you can sell it at a later date. The advantage of a Put Option (as against
Futures) is that your losses are limited to the Premium you pay on purchase of the Put Option.

For example, a Satyam 260 Put may quote at Rs 21 when Satyam is quoting at Rs 264. If Satyam falls
to Rs 244 in 8 days, the Put will move up to say Rs 31. You can make a profit of Rs 10 in the process.

No margins are applicable on you when you buy the Put. You need to pay the Premium in cash at the
time of purchase.

Sell Call Option

If you are moderately bearish (or neutral or bearish), you can consider selling a Call. You will receive
a Premium when you sell a Call. If the underlying Scrip (or Index) falls as you expect, the Call value
will also fall at which point you should buy it back.

For example, if Satyam is quoting at Rs 264 and the Satyam 260 Call is quoting at Rs 18, you might
well find that in 8 days when Satyam falls to Rs 244, the Call might be quoting at Rs 7. When you buy
it back at Rs 7, you will make a profit of Rs 11.

However, if Satyam moves up instead of down, the Call will move up in value. You might be required
to buy it back at a loss. You are exposed to an unlimited loss, but your profits are limited to the
Premium you collect on sale of the Call.
You will receive the Premium on the date of sale of the Option. You will however be required to
keep a margin with the exchange. This margin can change on a day to day basis depending on
various factors, predominantly the price of the scrip itself.

Bear Spreads

In a bear spread, you buy a Call with a high strike price and sell a Call with a lower strike price. For
example, you could buy a Satyam 300 Call at say Rs 5 and sell a Satyam 260 Call at Rs 26. You will
receive a Premium of Rs 26 and pay a Premium of Rs 5, thus earning a Net Premium of Rs 21. If
Satyam falls to Rs 260 or lower, you will keep the entire Premium of Rs 21. On the other hand if
Satyam rises to Rs 300 (or above) you will have to pay Rs 40. After set off of the Income of Rs 21,
your maximum loss will be Rs 19.

S B

Satyam Profit on 260 Profit on 300 Premium Net Profit

Closing Price Strike Call Strike Call Received on
(Gross) (Gross) Day One

250 0 0 21 21

255 0 0 21 21

260 0 0 21 21

270 -10 0 21 11

281 -21 0 21 0

290 -30 0 21 -9

300 -40 0 21 -19

310 -50 10 21 -19

The pay off profile appears as under:

In a bear spread, your profits and losses are both limited. Thus, you are safe from an unexpected rise
in Satyam as compared to a clean Option sale.

Combination of Futures and Options:-

If you sell Futures in a bearish framework, you run the risk of unlimited losses in case the
scrip (or index) rises. You can protect this unlimited loss position by buying a Call. This
combination will result effectively in a payoff similar to that of buying a Put.

You can decide the strike price of the Call depending on your comfort level. For example, Satyam is
quoting at Rs 264 currently and you are bearish. You sell Satyam Futures at say Rs 265. If Satyam
moves up, you will make losses. However, you do not want unlimited loss. You could buy a Satyam
300 Call by paying a small Premium of Rs 5. This will arrest your maximum loss to Rs 35.

If Satyam moves up beyond the Rs 300 level, you will receive compensation from the Call, which will
offset your loss on Futures. For example, if Satyam moves to Rs 312, you will make a loss of Rs 47 on
Futures (312 – 265) but make a profit of Rs 12 on the Call (312 – 300). For this comfort, you shell out
a small Premium of Rs 5 which is a cost.

C ] Other option startegies :

1. Covered Call

With calls, one strategy is simply to buy a naked call option. can also structure a
basic covered call or buy-write. This is a very popular strategy because it generates income
and reduces some risk of being long on the stock alone. The trade-off is that you must be
willing to sell your shares at a set price– the short strike price. To execute the strategy, you
purchase the underlying stock as you normally would, and simultaneously write–or sell–a
call option on those same shares.

For example, suppose an investor is using a call option on a stock that represents
100 shares of stock per call option. For every 100 shares of stock that the investor buys, they
would simultaneously sell one call option against it. This strategy is referred to as a covered
call because, in the event that a stock price increases rapidly, this investor's short call is
covered by the long stock position.Investors may choose to use this strategy when they
have a short-term position in the stock and a neutral opinion on its direction. They might be
looking to generate income through the sale of the call premium or protect against a
potential decline in the underlying stock’s value.

In the profit and loss (P&L) graph above, observe that as the stock price increases, the
negative P&L from the call is offset by the long shares position. Because the investor
receives a premium from selling the call, as the stock moves through the strike price to the
upside, the premium that they received allows them to effectively sell their stock at a higher
level than the strike price: strike price plus the premium received. The covered call’s P&L
graph looks a lot like a short, naked put’s P&L graph.

2. Married Put
 In a married put strategy, an investor purchases an asset–such as shares of
stock–and simultaneously purchases put options for an equivalent number of shares. The
holder of a put option has the right to sell stock at the strike price, and each contract is
worth 100 shares.

An investor may choose to use this strategy as a way of protecting their

downside risk when holding a stock. This strategy functions similarly to an insurance policy;
it establishes a price floor in the event the stock's price falls sharply.

For example, suppose an investor buys 100 shares of stock and buys one put
option simultaneously. This strategy may be appealing for this investor because they are
protected to the downside, in the event that a negative change in the stock price occurs. At
the same time, the investor would be able to participate in every upside opportunity if the
stock gains in value. The only disadvantage of this strategy is that if the stock does not fall in
value, the investor loses the amount of the premium paid for the put option.

In the P&L graph above, the dashed line is the long stock position. With the long put and
long stock positions combined, you can see that as the stock price falls, the losses are
limited. However, the stock is able to participate in the upside above the premium spent on
the put. A married put's P&L graph looks similar to a long call’s P&L graph.

3. Protective Collar

A protective collar strategy is performed by purchasing an out-of-the-money put

option and simultaneously writing an out-of-the-money call option. The underlying asset
and the expiration date must be the same. This strategy is often used by investors after a
long position in a stock has experienced substantial gains. This allows investors to have
downside protection as the long put helps lock in the potential sale price. However, the
trade-off is that they may be obligated to sell shares at a higher price, thereby forgoing the
possibility for further profits.

An example of this strategy is if an investor is long on 100 shares of IBM at $50 and
suppose that IBM rises to $100 as of January 1. The investor could construct a protective
collar by selling one IBM March 105 call and simultaneously buying one IBM March 95 put.
The trader is protected below $95 until the expiration date. The trade-off is that they may
potentially be obligated to sell their shares at $105 if IBM trades at that rate prior to expiry.

In the P&L graph above, you can observe that the protective collar is a mix of a
covered call and a long put. This is a neutral trade set-up, which means that the investor is
protected in the event of a falling stock. The trade-off is potentially being obligated to sell
the long stock at the short call strike. However, the investor will likely be happy to do this
because they have already experienced gains in the underlying shares.

4.Long Straddle
A long straddle options strategy occurs when an investor simultaneously
purchases a call and put option on the same underlying asset with the same strike price and
expiration date. An investor will often use this strategy when they believe the price of the
underlying asset will move significantly out of a specific range, but they are unsure of which
direction the move will take. Theoretically, this strategy allows the investor to have the
opportunity for unlimited gains. At the same time, the maximum loss this investor can
experience is limited to the cost of both options contracts combined.
 In the P&L graph above, notice how there are two breakeven points. This strategy
becomes profitable when the stock makes a large move in one direction or the other. The
investor doesn’t care which direction the stock moves, only that it is a greater move than
the total premium the investor paid for the structure.

5. Long Call Butterfly Spread

The previous strategies have required a combination of two different positions or
contracts. In a long butterfly spread using call options, an investor will combine both a bull
spread strategy and a bear spread strategy. They will also use three different strike prices.
All options are for the same underlying asset and expiration date.

For example, a long butterfly spread can be constructed by purchasing one in-the-
money call option at a lower strike price, while also selling two at-the-money call options
and buying one out-of-the-money call option. A balanced butterfly spread will have the
same wing widths. This example is called a “call fly” and it results in a net debit. An investor
would enter into a long butterfly call spread when they think the stock will not move much
before expiration.

In the P&L graph above, notice how the maximum gain is made when the stock
remains unchanged up until expiration–at the point of the at-the-money (ATM) strike. The
further away the stock moves from the ATM strikes, the greater the negative change in the
P&L. The maximum loss occurs when the stock settles at the lower strike or below (or if the
stock settles at or above the higher strike call). This strategy has both limited upside and
limited downside.

D ] Other future startegies :

1 The Pullback Strategy :

The pullback strategy is a powerful futures trading strategy that is based on

price pullbacks. A pullback occurs during trending markets when the price breaks above or
below a support/resistance level, reverses and retests that broken level again. During
uptrends, the price breaks above a well-established resistance level, reverses and retests
the resistance level. Once the retest is complete, a trader would enter with a long position
in the direction of the underlying uptrend. During downtrends, the price breaks below a
well-established support level, reverses and retests the support level again. This is a
pullback, and a trader would enter with a short position in the direction of the underlying
downtrend.

Pullbacks form when market participants start to take profits, pushing the price in
the opposite direction of the initial breakout. Market participants who missed out the initial
price-move are waiting for the price to return to the broken support/resistance level in
order to enter at a more favourable price, pushing the price up again. Pullbacks take
advantage of an important phenomenon in technical analysis. When an important support
or resistance level breaks, that level changes its nature and becomes a resistance or support
level, respectively.

A broken support level becomes a resistance level, and a broken resistance level
becomes a support level. This is especially true on higher timeframes, such as the daily,
although it can also be observed on shorter-term timeframes, such as the 30-minutes or 1-
hour ones. When trading pullbacks, traders should place stop-loss orders just below the
retested support level (previously resistance) during uptrends, and aim for the recent highs
as their profit target. Similarly, stop-losses should be placed above the retested resistance
level (previously support) during a downtrend, with profit targets set at recent lows.

2 Trading the Range :

Trading the range refers to trading the bounce off important support and resistance
levels in a chart. Certain markets like to trend, such as stocks, while others like currencies
like to trade in a range. Most market participants are still humans who have emotions and
memories. When the market has difficulties to break above a certain price-level, market
participants will refer to that level as a resistance level. When the price reaches the same
level again, some traders will start to take profits and others will open short positions in the
market, both of which will increase selling pressure on the financial instrument and likely
send the price down.

On the other hand, when the price has difficulties to break below a certain level
and reaches that same level again, market participants who have been already shorting the
market might start taking profits while other will start buying at those lower prices, both of
which will increase buying pressure on the financial instrument and likely send the price up.
Those levels are referred to as support levels. When trading the range, the first thing you
need to care about is whether the market is actually trading in a range (sideways). If there’s
an absence of higher highs or lower lows in the price, both of which are signs of a trending
market, then the current market environment is likely a ranging market.
 Alternatively, you could use trend-following technical indicators such as the ADX
indicator. An ADX value below 25 signals that the market is not in a trend. Place your stop-
loss levels just above an important resistance level if you’re shorting the market, or just
below an important support level if you’re buying the market. You don’t want to stay inside
a trade if the traded support/resistance level gets broken, so place the stop-loss level near
the level but add some room to account for fake breakouts, volatility, and market noise.
Profit targets should be placed near recent highs/lows, S/R zones or other important
technical levels.

3 Breakout Trading :

One of the most popular approaches in day trading, breakout trading has a huge
following among futures traders. As its name suggests, breakout trading aims to catch the
market volatility that occurs when the price is breaking out of chart patterns, channels,
trendlines, horizontal S/R levels, and other technical levels. Popular chart patterns for
trading breakouts include the head and shoulders pattern (trading the neckline breakout),
rectangle, pennant and triangle patterns that often signal a continuation of the underlying
trend, and double tops and bottoms. Just after a breakout occurs, the market usually
experiences increased volatility as numerous pending orders become executed. Breakout
traders try to take advantage of that volatility rise by taking positions in the direction of the
breakout. Pending orders are often used by breakout day traders to catch a breakout trade.
Pending orders such as buy stops and sell stops become market orders when the price
reaches the pre-specified price-level. This way, traders don’t have to wait for the actual
breakout to occur in order to catch the consecutive volatility.

Stop-loss levels are usually placed just above (for short positions) or below (for
long positions) the technical level where the price broke out. Markets often form pullbacks
to the broken technical level which allows traders to add to their open positions and new
traders to join the market. Take-profit targets depend on the type of the breakout. For
example, a head and shoulders pattern projects a profit target that is equal to the height of
the pattern, measured from the neckline to the top of the head which is then projected
from the breakout point. Triangle and rectangle patterns have a profit target that is equal to
the height of those patterns measured from their base. Alternatively, traders can also set
other profit targets based on recent swing highs and lows or shorter-term support and
resistance levels.
4 Fundamental Trading Strategy :

While most of the futures trading strategies explained in this article are technical
in their nature, you need to be aware that most high-volatility price-moves are a byproduct
of changes in the underlying instrument’s fundamentals. Fundamentals initiate and reverse
trends and break important support and resistance levels. Professional futures traders need
to be up-to-date on fundamental developments of the traded financial instrument. As a rule
of thumb, fundamental traders base 80% of their trading decisions on fundamentals and
20% on technicals.

One of the main drawbacks of fundamental analysis is that it doesn’t provide

exact price-levels to trade on, and that’s where technical analysis comes into play.
Fundamentals are used to determine whether to go long or short, and technicals to set
profit targets and stop-loss levels.An easy yet effective fundamental trading strategy is to
follow micro-fundamental releases. Check the trend for the last three reports. For example,
if you’re trading futures on currencies, then economic growth reports, inflation reports, and
labour market data can have a tremendous impact on exchange rates. Central banks follow
these reports to adjust their monetary policy. When economic growth is slowing down,
inflation doesn’t pick up and unemployment rates are rising, central banks usually cut rates
to stimulate economic activity. The opposite is true when economic growth is high, inflation
reports are near the central bank’s inflation target and labour markets are strong – that’s
when central banks usually hike interest rates to prevent the economy from overheating.
Rate cuts cause the domestic currency to fall, while rate hikes lead to currency
appreciations. By following these reports and their last three releases, traders can get an
idea of where the central bank’s policy is heading. Is there a higher probability for a rate cut
or rate hike? Get your trading direction from fundamentals, and use technicals to fine-tune
entry and exit targets. The same strategy can be applied to other markets as well, such as
the futures on stocks, commodities, and metals.

5 Trend-Following :

One of the best futures trading strategies are trend-following strategies. They
(mostly) work, have a proven track-record and are quite easy to follow. So, what is a trend-
following strategy? As its name suggests, these strategies aim to enter in the direction of
the underlying trend. If the trend is up, a trend-following strategy would only look for
suitable long positions. Similarly, if the trend is down, a trend-following strategy would only
look for potential short positions. You may have heard the saying “buy low, sell high” and
“the trend is your friend.” But, how can a trader know at what “low” to buy and what “high”
is high enough? To answer that important question, let’s quickly cover how trends form. In
an uptrend, the price makes higher highs and higher lows with each higher low representing
a counter-trend move. Those counter-trend moves are price corrections that form as the
result of profit-taking activities, or when sellers start to pushing an overstretched up-move
lower.

The best time to buy during an uptrend is at the higher low, i.e. the bottom of the
price correction. This is exactly the point where the underlying uptrend should resume. The
same is true for downtrends, only that you would look for the tops of lower highs to enter
with a sell position.

Chapter : 4
 FINDINGS, CONCLUSIONS,
RECOMMENDATION, BIBLIOGRAPHY

4.1 FINDINGS

• Derivatives provided seven additional trading instruments to the investors.

• Derivatives, as their name implies, are contracts they are based on or derived from some
underlying assets, reference rate, or index. Most common financial derivatives, described
later, can be classified as one, or a combination, of four types: swaps, forwards, futures,
and options that are based on interest rates or currencies.
• Without clearly define risk management strategy, use of financial derivatives can be
dangerous. It can be threaten the accomplishment of a firm’ s long range objectives and
result in unsafe and unsound practices that could lead to the organization’ s insolvency. But
when used wisely, financial derivatives can increase shareholder value by providing a means
to better control a firm’ s risk exposures and cash flows.

• Financial derivatives can be used in two ways: to hedge against the unwanted risk or to
speculated by taking a position in anticipation of a market movement.

• Financial derivatives have changed the face of finance by creating new ways to understand,
measure, and manage risks. The freedom to manage risk effectively must not be taken
away.

• Different trading strategies can be used by investors under different market trends i.e.
bullish, bearish, range bound and volatile market. But it is not easy to make profits in cash
market in different market trends

• Derivatives offer organizations the opportunity to break financial risks into smaller
components and then to buy and sell those components to best meet specific risk
management objectives. Moreover, under a market-oriented philosophy, derivatives allows
for the free trading of individual risk components, thereby improving market efficiency.
Using financial derivatives should be considered a part of any business’ s risk management
strategy to ensure that value enhancing investment opportunity could be pursued.

• From the simple forward agreement, financial future contracts were developed. Futures are
similar to forwards, except that futures are standardized by Exchange clearinghouse, which
facilitated anonymous trading in more competitive and liquid market. In addition futures
contracts are marked to market daily, which greatly decreases counter-party risk. The other
party to the transaction will be unable to meet its obligation on the maturity dates.

• Derivatives also help to improve market efficiencies because risk can be isolated and sold to
those who are willing to accept them at the least cost. Using derivatives breaks risk into
pieces that can be managed independently. Corporations can keep the risk they are most
comfortable managing and transfer those they do not want to other companies that are
more willing to accept them. From a market-orientated prospective, derivatives offer the
free trading of financial risks.
 • Most of the investors have not sufficient knowledge of derivative instruments, and hence
they deal in cash market (equity market) only.

4.2 CONCLUSION:

The project was done in order to understand and study various trading strategies used in derivatives.
It included the study of various instruments like forward, future and options.

On the basis of the analysis done, I conclude the following –

Derivatives are the contracts derived form some underlying stock or index. Most of common
Derivative instruments are futures, options.
 Various trading strategies like bullish, bearish, neutral and volatile strategies can be used by
the investors according to the market trends.

Derivatives have become very important in the field finance. They are very important financial
instruments for risk management as they allow risks to be separated and traded. Derivatives
are used to shift risk and act as a form of insurance.

There are very few people knowing exactly what derivatives is all about.

In my concluding part I would like to say that Derivatives could be a very effective tool to take
advantage of a rising, falling and range bound underlying. But for that awareness is to be
created about the terminology of derivatives.

But as it is said “High risk high return” future and option are best way for hedging risk for high &
high returns.

4.3 RECOMMENDATION

1) Market sentiment at the time on purchase: It is often that timing is everything but
the longer your time horizon, the less important is timing of your purchase. Market
sentiment can be gauged by the general direction of various market indices, the
number of companies’ exceeding or not meeting earnings & what the investment
community (analyst, brokers, traders, investors, commentators) are saying about
equities in general or specific equities that pertain to the one you are considering.

2) Industry of the company: Many industries have are cyclical in nature. Thus a
company may report excellent earning and posses strong fundamentals moving
forwards, but due to it’ s cyclical nature will decline over a given time period. You
should also evaluate the growth prospectus of the industry. For instance, wireless is
as area that is expected to see a lot of growth in coming years. Be careful though, as
only a few companies often dominated sectors that are in their infancy in the long
term future.
 3) The concept of derivatives is not very simple. An investor should therefore have sound
knowledge of technical terms in Derivatives before dealing in Future market.
4) An investor can use different strategies like bullish, bearish, neutral and volatile strategies
in different market trends i.e. bullish, bearish, range bound and volatile market.
5) The investor should also note that the price of future contracts depends on many factors
which are uncontrollable. Therefore he should take care of such factors.

4.4 Bibliography

Reference Book:

NCFM Module – Derivatives Market (Dealer and Equity ) Module-

NSE India

Websites:
www.sbicap securities.com

www.nseindia.com

www.derivativesindia.com

www.bseindia.com

www.stock-option-trading.com

www.moneycontrol.com