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“EFFECTIVENESS OF NIFTY STOCKS AND OPTIONS STRATEGY

INTRODUCED BY NATIONAL STOCK EXCHANGE "

SHAIKH MOHAMMADIMRAN ABDULSAEED

Assistant Professor
S.R.Luthra Institute of Management
contact no : 9879068469
email : imran15381@yahoo.co.in

discipline : PROFESSIONS AND APPLIED SCIENCES

sub discipline : finance
subject : risk management

ABSTRACT :
With the integration of the financial markets and free mobility of capital, risks also
multiplied. With Globalization becoming part and parcel in the 21 st century, integration of the
world economies is bound to occur which in turn makes every economy more vulnerable to
any disturbance that occurs in any part of the world. For instance the recent occurrence of
Subprime crisis which has shook all the stocks markets of the world and also is the cause for
slowdown of the global economy. Subprime has occurred in USA, which consumes 40 per
cent of the world consumption. Housing sector has a weight age of 67 per cent in their
economy so any jerk in that sector is bound to shook the world economy. US investment
banks have lended $ 3.3 trillion and now they are unable to recover any money from the
debtors. Indian stock markets witnessed lower circuits of 10 per cent on January 22, 2008
when the markets plunged into deep red thus eroding lot of wealth of the investors. Another
example is of, when countries adopt floating exchange rates, they have to face risk due to
fluctuations in exchange rates. Deregulation of interest rates cause interest risks. Again,
securitization has brought with it the risk of default or counter party risk. Apart from it, every
asset whether commodity or metal or share or currency is subject to depreciation in its value.
It may be due to certain inherent factors external factors like the market condition,
Government policy, economic and political conditions prevailing in a country and so on.
key words : derivative, options

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Introduction :
NSE has declared so many instruments for investor to invest and to hedge also. but all
the instrument now not trading with that perspectives. more than 85% of the volume on NSE
and BSE comes from derivatives segments. it is implied that these all instrument are now
converting to speculate. as investors speculate it may give return either positive or negative.
which is very risky. so options introduced, with the unique features like safety option.
maximum profit and maximum loss features were added too. they some strategy was also
intruded in options. there are 11 strategies for bull and 11 for bear. just need to understand
bull or bear market and take the position. in this research the study focuses on which option
strategy of more fruitful for which company.

Derivatives defined:- In the Indian context the Securities Contracts Regulation Act, 1956
[SCRA defines “derivative’ to include”-
1. A security derived from a debt instrument, share, and loan whether secured or
unsecured, risk instrument or contract for differences or any other form of security.
2. A contract, which derives its value from the prices, or index of prices, of underlying
securities.
Derivatives are securities under the SCRA and hence the regulatory framework under the
SCRA governs the trading of derivatives.

OPTIONS:- Options are of two types call 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 buyer 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.

Strategies introduce by National Stock Exchange for investors

Strategy 1: Long Call
Strategy 2: Short Call
Strategy 3: Synthetic Long Call
Strategy 4: Long Put
Strategy 5: Short Put
Strategy 6: Covered Call
Strategy 7: Long Combo
Strategy 8: Protective Call

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Strategy 9: Covered Put
Strategy 10: Long Straddle
Strategy 11: Short Straddle
Strategy 12: Long Strangle
Strategy 13: Short Strangle
Strategy 14: Collar
Strategy 15: Bull Call Spread Strategy
Strategy 16: Bull Put Spread Strategy
Strategy 17: Bear Call Spread Strategy
Strategy 18: Bear Put Spread Strategy
Strategy 19: Long Call Butterfly
Strategy 20: Short Call Butterfly
Strategy 21: Long Call Condor
Strategy 22: Short Call Condor

Problem statement :
The main research question to be studied here is “Effectiveness of stock option
strategy of national stock exchange”. there are 22 different strategy with the combination of
bull and bear period of the market. but strategy hadn't define which strategy will be effective
for which company. this study will help those investors who trade in option but don't know in
which company which strategy should implement .
Literature review :
With the emergence of financial derivatives, the fund managers have included them as
a standard in modern portfolio management. Derivatives have widely been used as they
facilitate hedging, that is, they enable fund mangers of an underlying asset portfolio to
transfer some parts of the risk of price changes to others who are willing to bear such risk.
Options are the specific derivative instruments that give their owner the right to buy (call
option holder) or to sell (put option holder) a specific number of shares (assets) at a specified
price (exercise price) of a given underlying asset at or before a specified date (expiration
date). In lieu of this privilege, the holder of the option (long position) pays a market
determined price (option premium) to the writer or seller (short position) of the option.
Adam and Maurer (1999) suggest that the non-linear pay off characteristics of options
requires the use of dynamic portfolio rebalancing. However, from practical point of view,
dynamic portfolio rebalancing is often neither feasible nor desirable, instead, investors

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prefers to implement a buy-and- hold strategy over specific period of time. Therefore, the
present study has used buy-and-hold strategies involving future & options and a combination
their-off, like Naked Future, Covered Call, Straddle and Strangle
In an attempt to make appropriate investment decisions in particular under risk the
portfolio manager must be able to compare the hedging effectiveness of the strategies
involving the use of options under covered call and the pure option strategies like straddle
and strangle. The study also examines the risk and return associated to taking of future
position as buy-and-hold strategy vis-à-vis cash position
The main objectives of the study are:-

1. Practically examine the option strategies introduce by “National Stock Exchange”

2. Effectiveness of strategy for specific stocks.
3. Basic loop fall in option strategy
4. Suitability of a specific strategy for specific sector.
5. Pricing of the strategy whether bid ask spread is workable or not.
6. Carry forward the option contract till far month [3 rd month] and to see whether it gives The
return according to the strategy or not?
7. To identify various strategies that is formed using options.

research methodology :
Type of research: - explorative : This study was basically an explorative study as it had
taken a good amount of time to explore the effectiveness of the strategy. this research had
checked whether the strategy practically applicable or not. this research had focused on that
part that which strategy for bear or bull period is most suitable for earning.
Data collection methods:- Data collection is the most important factor and a heart of the
project as without it no study can be done. In this research data were collected from primary
and secondary sources
1. Primary data:-
All the primary data was collected from live stock and index prices of national stock
exchange websites. as such all prices were such like investors are taking real actual position
in their portfolio. All stock prices and all call put premium price are also collected from live
national stock exchange website " nseindia.com"
2. Secondary data: -

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 Secondary data comes from the national stock exchange website. And from their
NCFM departments option module and some data from the study magazines and different
websites also. All the option strategy has been given in for the purpose of guidelines by
national stock exchange. And for the same there are so many books available for this strategy
also. Some data has been collected from research article of national stock exchange and
Indian institute of management.

Period of Study: - The study has been done for the period (may - June, June- July and July
august 2013)
advantages :

1. this study will help those investors who invest or want to invest in options segment
2. this study will focus on the part where investor can take strategy according to market
condition.
3. this study will also focus on liquidity part of the option segment
4. this study will also help investors to hedging strategy.
5. stock specific option can be also taken by this study
6. this study will also helpful in deciding the trend with minimum investment and
minimum risk.
disadvantage :
1. time period is the most important factors. to check the complete effectiveness of all
strategies. strategies need to rollover to very long period of time. may be one year help a
lot.
2. trend of the company that is bull or bear may be change very soon. that factor can't be
consider while investing in options
3. liquidity is the most important factor while investing in options. some stock are having
very good liquidity while some doesn't have liquidity at all .so at that time difficult to take
the investment decision
4. options are very fragile in nature. some time stock doesn't move at all. while premium
basically eaten as time till expiry factor affect the most.

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 Data Analysis And Interpretation: (Aggregate profit and loss of the all three months strategy.)
Scrip short call buy put Protective Covered Short Short Bear call Bear put Long call -Short total
call put straddle strangle spread spread butterfly call
strategy strategy butterfly
NIFTY -13957.3 -36687 -24426 6478.4 23554.5 17509.5 -12450.7 13384.5 -2349.55 -413.6 -29357.3

RELIANCE 15435.3 -4519.4 14485.65 34751 -54405.7 8069.2 77699 55154 49917.9 -52682.6 143904
INDUSTRY
BHEL -12217.3 -12494 -43864.9 8453.3 28687.1 36359.6 -35693.2 10484.5 16887.95 -19652.6 -23049.6

Ntpc 32708.65 -7738 -8506.35 -3112.7 -22709.2 13528.25 -52284.9 29452.9 71824.2 -74588.3 -21425.5

Infosys -24904.8 -22944 -24799.2 14785 43209.3 22769.2 -37650.7 22039.3 15877.95 -18641.6 -10259.6

TATA STEEL 42744.1 -48476 -24817.3 62909 112458 47365.4 -52260 66197.7 489.75 -3254.3 203356

TATA -115291 -64647 -94658.4 -64611.7 26466.4 -48800.7 -106261 56768.9 80812.95 -83577.6 -413799
MOTOR
DLF LTD -35384.4 -16024 -50810.5 5496 89669 23229.5 -58131 94749 41338 -44103 50028.6

Icici -37130.4 -15044 -53356.4 410 56359 3159.5 -70078 28008.9 42157.95 -44923 -90436.5

CIPLA LTD 37592.3 4530 1121.6 44538.7 20185 9309.5 -31941 57747 26242.45 -29006.6 140319

total -110405 -224043 -309632 110097 323473 132499 -379052 433987 343200 -370843 -50719.2

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Findings and Analysis:
1. NIFTY was increased in this time period and so that net loss is 29,357/- but three
strategies were able to give profit and seven strategies has given loss
2. RELIANCE INDUSTRY was the only stock which has performed the best according to
its trend. It has provided a profit of rs.1, 43,905/- but still three strategies has given
negative return and seven had given positive return
3. In spite no volatility in the stock of BHEL it has given a negative return of rs
23050/-.five strategy was successful and five strategies were negative in this study
4. NTPC was also very volatile in this tenure and it has also given a negative return of rs
21426 /-.four strategies were in positive zone and six in negative zone.
5. INFOSYS was very volatile in this time period and swung both way but given a loss of rs
10260/-.five strategies have given profit and five has given a loss.
6. TATA STEEL was very volatile in this time period and able to secure a profit of rs 2,
03,356/-. Able to give profit in six strategies and loss in four strategies.
7. TATA MOTOR was increased the most and given a biggest loss of rs 4, 13,800.only able
to give profit in three strategies and loss in seven strategies.
8. DLF LTD has given a good profit of rs 50,029 and also able to give profit in five
strategies and loss in five strategies.
9. ICICI BANK has also increased in this time period and incurred a loss of rs 90437/-.but
able to give profit in 5 and loss in five strategies.
10. CIPLA LTD ltd was also very accurate in this study and able to give a profit.

Conclusions :
1. Bear put spread strategy is the best strategy to take position in the bear trend of the
market and of the individual stock. As it is giving the highest profit of rs 4.34.000/-. And
able to give profit in all the stocks and in the NIFTY.
2. Long call butterfly is also very dynamic strategy to take the position in the stock as it is
giving profit in 9 stocks out of 10 with the profit of rs 3,43,200/-.
3. Short strangle has also given a profit of rs. 1, 32,499/- with profit in 9 stock out of 10.
4. Short straddle has also given a positive return of rs. 3, 23,473/-. With profit in 8 stock out
of 10.
5. Covered put has also given a prpfit of rs 1,10,097/- profit in 8 stock out of 10
6. Only TATA MOTOR was having a loss in short strangle.
7. Only NIFTY was having a loss in long call butterfly strategy

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8. Short call butterfly is the most avoidable strategy in bear run as it is giving a loss of rs.
370843/-
9. Buy put strategy is also not a suitable strategy to take a position in bear market.
10. Bear put spread and Protective call strategy are not suitable for stock as it is giving loss
in 8 stock out of 10
Recommendations
1. For RELIANCE INDUSTRY stock it is advisable to invest in bear call spread strategy
and bear put spread strategy in bear period of the stock.
2. For NIFTY it is advisable to invest in short straddle and bear put spread strategies in bear
phase of the market.
3. For BHEL it is advisable to invest in short straddle & short strangle in bear phase of
stock.
4. For NTPC it is advisable to invest in long call butterfly and short call strategy for the bear
period of the stock
5. For Infosys it is advisable to invest in short straddle strategy in bear period of the stock
6. For TATA STEEL it is advisable to invest in short straddle, covered put and bear put
spread strategy in the bear run of the stock
7. For TATA MOTOR it is advisable to invest in long call butterfly and bear put spread
strategy in the bear run of the stock.
8. For DLF LTD it is advisable to invest in bear put spread strategy for bear period of stock.
9. For ICICI BANK LTD it is advisable to invest in short straddle and long call butterfly for
the bear period of the stock.
10. For CIPLA LTD it is advisable to invest in bear put spread strategy for the bear phase of
the stock.
references :
1. Garman, M and M.Klass, (1980). “On the Estimation of Security Price Volatilities
from Historical Data. retrieved from
http://econpapers.repec.org/article/ucpjnlbus/default11.htm

2. Parkinson, M., (1980).The Extreme Value Method of Estimating the Variance of the
Rate of Return. Journal of Business 53, 61-66. retrieved from
http://onlinelibrary.wiley.com/doi/10.1002/fut.3990120303/abstract