Nifty

A
Project
On
Study of Nifty Derivatives
&
Risk Minimization Trading Strategy
IN PARTIAL FULFILMENT FOR THE REQUIREMT OF THE PROJECT STUDY COURSE
OF TWO YEAR (FULL TIME) M.B.A. PROGRAMME
College:
IIBS BANGALORE
Submitted by:
NAME: PARMJEET KUMAR SINGH
ROLL NO: 38 (S09)
SECTION: A
Email address:- param0788@gmail.com
Mobile no:- 09019194668
Submitted to:
INTERNATIONAL INSTITUTE OF BUSINESS STUDY

CERTIFICATE FROM INSTITUTE
This is to certify that Mr. Ankit Shah and Mr. Ashish Ashara, students of MBA
(2008-10 batch) at N.R. Institute of Business Management, Gujarat University,
Ahmedabad have prepared a Grand Project on “Study of Nifty Derivatives & Risk
Minimization Trading Strategies” in partial fulfillment of two years full-time MBA
Program of Gujarat University. This project work has been undertaken under the
guidance of Prof. Anjali Choksi, core faculty at N.R. Institute of Business Management,
Gujarat University, Ahmedabad.
This is also to ascertain that this project has been prepared only for the award of
MBA degree and has not been submitted for any other purpose.
Dr. Hitesth Ruparel Prof. Anjali Choksi

Director Core faculty
_________________ _________________
Date: 20/03/2010
Place: Ahmedabad

PREFACE
Derivatives occupy a very significant place in the field of finance and are virtually driving
the global financial markets of the day. Several markets of the world have witnessed a
phenomenal rise in trading derivative instruments over a past three decades.
With the world embracing the derivatives trading on a large scale, the Indian market
obviously cannot remain aloof, especially after liberalization has been set in motion.
Derivatives are like a deep ocean of knowledge for the learners of finance. The reason to
choose this subject was the emergence of derivatives trading in the different sectors of the
Indian economy. Derivatives are the means to achieve the objectives like risk management
by fund managers and hedging by traders. By looking at the importance of the derivatives
we make an attempt to determine the trend of Nifty and on the basis of that framing trading
strategies to minimize the risk while maximize the profit exposure.
This project would be a powerful base for us to undergo further studies in the risk
management field and even in the field of finance as a whole.
ACKNOWLEDGEMENT
Motivation and co-operation are the main two pillars on which the success
of any project relies. So first of all we would like to thank core faculty and
our project guide Prof. Anjali Choksi who made us aware about the project
and motivated us to work on the guidelines of this unique, new and
knowledge based project. She has guided us at each and every stage of the
project. She has been enthusiastically involved in every aspects of the

project. Overall we are highly indebted to her for all the knowledge,
guidance and motivation that she has provided us throughout our project.
We would also like to thank our friends and those who have helped us
during this project directly or indirectly.
Every person wants to prove himself in this fast, dynamic and cut-throat
competitive world. When he/she gets an opportunity to do so then he or she
will find that success is very near to him/her. So, we would like to
acknowledge our thanks to our Director Prof. Hitesh Ruparel who gave us
opportunity to prove ourselves. We also would like to express our gratitude
to our project Co-ordinator Mr.Sunil c.Shah (Vice-president Arcadia
Shares & stock Brokers pvt ltd & Mr. Kalpesh d.Shah
(Business Associate- Arcadia shares & stock brokers Pvt ltd) and the
Manager of Arcadia Shares & stock brokers Pvt Ltd. for their kind
support and assistance.
ANKIT SHAH
ASHISH ASHARA

EXECUTIVE SUMMARY
One of the interesting developments in financial markets over the last 15 to 20 years has
been the growing popularity of derivatives or contingent claims. In many situations, both
hedgers and speculators find it more attractive to trade a derivative on an asset than to trade
the asset itself. Some derivatives are traded on exchanges. Others are made available to
corporate clients by financial institutions or added to new issues of securities by
underwriters.
In this report we have included history of Derivatives. Than we have included Derivatives
Market in India. Than after we have included stock market Derivatives.
In this report we have taken a first look at forward, futures and options contracts. A
forward or futures contract involves an obligation to buy or sell an asset at a certain time in
the future for a certain price. There are two types of options: calls and puts. A call option
gives the holder the right to buy an asset by a certain date for a certain price. In India the
derivatives market has grown very rapidly. There are mainly three types of traders:
hedgers, speculators and arbitrageurs.
In the next section, we have tried to determine the study of Nifty derivatives for the short
term period using the two important indicators namely Open Interest & Put/Call Ratio. In
which Put/Call Ratio analysis proves to be more effective indicators. Moreover in the
analysis of Put/Call Ratio, Combination of Open Interest & Volume gives more accurate
results.
In the last section, we have determined different trading strategies for different market
views i.e. Bullish, Bearish, Range bound & Volatile. On the basis of investors’ perceptions
they can use suited strategies which will minimize the loss. There are also some arbitrage
strategies prevailing in the market like reversal, conversion etc. which give fix amount of
profit irrespective of market movements but it is not readily available in the market but one
has to grab such Opportunities.
PLACE:
DATE:

INDEX
Sr. Pg.
no Topics no.
INTRODUCTION TO INDIAN CAPITAL MARKET 1

1
2 INTRODUCTION TO DERIVATIVES 4
3 DEVELOPMENT OF DERIVATIVES MARKET IN INDIA 9
4 RESEARCH METHODOLOGY 12
5 STOCK MARKET DERIVATIVES 15
6 INTRODUCTION TO FUTURES 19
7 INTRODUCTION TO OPTIONS 37
8 INDICATORS OF INVESTING IN FUTURES & OPTION 62
9 OPEN INTEREST 64
10 PUT/CALL RATIO 68
ANALYSIS
[a]STUDY OF SHORT TERM TREND OF NIFTY DERIVATIVES
USING:
11  Open Interest 71
 Put/Call Ratio
[b]RISK MINIMIZATION TRADING STRATEGIES USING
FUTURES & OPTION
FINDINGS 177
CONCLUSION 179
180
BIBLIOGRAPHY

181
GLOSSARY

CHAPTER
1
INTRODUCTION TO
CAPITAL

CH. 1 INTRODUCTION TO INDIAN CAPITAL MARKET
CAPITAL MARKET
In today’s era investor invest their funds after basic analysis. The basic function of
financial market is to facilitate the transfer of funds from surplus sectors that is from
(lenders) to deficit sectors (borrowers). If we look at the financial cycle then we can say
that households make their savings, which is provided to industrial sectors, which earn
profit and finally this profit will go to the households in the form of interest and dividend.
Indian Financial System is made-up of 2 types of markets i.e. Money market & Capital
Market. The money market has 2 components-The organized & unorganized. The
organized market is dominated by commercial banks. The other major participants are
RBI, LIC, GIC, UTI, and STCI. The main function of it is that of borrowing & lending
of short term funds. On the other hand unorganized money market consists of indigenous
bankers & money lenders. This sector is continuously providing finance for trade as well
as personal consumption.
Capital Market
Primary Market
Secondary Market
To create funds, new firms use Primary Market by publishing their issues in different
instruments. On the other hand Secondary Market provides base for trading and securities
that have already been issued.
PAST OF SHARE MARKET
Before 1996, all the transactions were done through physical form in security market.
Because of physical form investors were facing so many problems.
At that time the certificates were transferred to the purchase holder. On the other hand they
are now transferred directly in their electronic form which is much more quicker and safer.
BSE
The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as
"The Native Share and Stock Brokers Association". It is the oldest one in Asia, even
older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary
non-profit making Association of Persons (AOP) and is currently engaged in the process of
converting itself into demutualised and corporate entity. It has evolved over the years into

its present status as the premier Stock Exchange in the country. It is the first Stock
Exchange in the Country to have obtained permanent recognition in 1956 from the Govt.
of India under the Securities Contracts (Regulation) Act, 1956.
NSE
To obviate the problem, RELATED TO PHYSICAL FORM the NSE introduced screen
based trading system (SBTC) where a member can punch into the computer the quantities
of shares & the prices at which he wants to transact.

CAHPTER
2
INTRODUCTION TO
DERIVATIVES

CH 2 INTRODUCTION TO DERIVATIVES
The term "Derivative" indicates that it has no independent value, i.e. its value is entirely
"derived" from the value of the underlying asset. The underlying asset can be securities,
commodities, bullion, currency, livestock or anything else. In other words, Derivative
means a forward, future, option or any other hybrid contract of pre determined fixed
duration, linked for the purpose of contract fulfilment to the value of a specified real or
financial asset or to an index of securities.
Derivatives in mathematics, means a variable derived from another variable. Similarly in

the financial sense, a derivative is a financial product, which has been derived from a
market for another product. Without the underlying product, derivatives do not have any
independent existence in the market.
Derivatives have come into existence because of the existence of risks in business. Thus
derivatives are means of managing risks. The parties managing risks in the market are
known as HEDGERS. Some people/organisations are in the business of taking risks to
earn profits. Such entities represent the SPECULATORS. The third player in the market,
known as the ARBITRAGERS take advantage of the market mistakes.
The need for a derivatives market
The derivatives market performs a number of economic functions:
1. They help in transferring risks from risk averse people to risk oriented people.
2. They help in the discovery of future as well as current prices.
3. They catalyze entrepreneurial activity.
4. They increase the volume traded in markets because of participation of risk-averse
people in greater numbers.
5. They increase savings and investment in the long run.
Factors driving the growth of financial derivatives
1. Increased volatility in asset prices in financial markets,

2. Increased integration of national financial markets with the international markets,
3. Marked improvement in communication facilities and sharp decline in their costs,
4. Development of more sophisticated risk management tools, providing economic
agents a wider choice of risk management strategies, and
5. Innovations in the derivatives markets, which optimally combine the risks and
returns over a large number of financial assets leading to higher returns, reduced
risk as well as transactions costs as compared to individual financial assets.
A derivative is a financial instrument whose value depends on the value of other, more
basic underlying variables.
The main instruments under the derivative are:

1. Forward contract
2. Future contract
3. Options
4. Swaps
1. Forward Contract:
A forward contract is a particularly simple derivative. It is an agreement to buy or sell an

asset at a certain future time for a certain price. The contract is usually between two
financial institutions or between a financial institution and one of its corporate clients. It is
not normally traded on an exchange.
One of the parties to a forward contract assumes a long position and agrees to buy the
underlying asset on a specified future date for a certain specified price. The other party
assumes a position and agrees to sell the asset on the same date for the same price. The
specified price in a forward contract will be referred to as delivery price. The forward
contract is settled at maturity. The holder of the short position delivers the asset to the
holder of the long position in return for a cash amount equal to the delivery price. A
forward contract is worth zero when it is first entered into. Later it can have position or
negative value, depending on movements in the price of the asset.
2. Futures Contract:
A futures contract is an agreement between two parties to buy or sell an asset at a certain
time in the future for a certain price. Unlike forward contracts, futures contract are
normally traded on an exchange. To make trading possible, the exchange specifies certain
standardized features of the contract. As the two parties to the contract do not necessarily
know each other, the exchange also provides a mechanism, which gives the two parties a
guarantee that the contract will be honoured.
One way in which futures contract is different from a forward contract is that an exact
delivery date is not specified. The contract is referred to by its delivery month, and the
exchange specifies the period during the month when delivery must be made.
3. Options:
An option is a contract, which gives the buyer the right, but not the obligation, to buy or
sell specified quantity of the underlying assets, at a specific (strike) price on or before a
specified time (expiration date). The underlying may be commodities like wheat/rice/
cotton/ gold/ oil/ or financial instruments like equity stocks/ stock index/ bonds etc.
There are basic two types of options. A call options gives the holder the right to buy the
underlying asset by a certain date for a certain price. A put option gives the holder the right
to sell the underlying asset by a certain date for a certain price.

4. Swaps:
Swaps are private agreements between two companies to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward
contracts.
5. Warrants:
Options generally have lives of upto 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.
6. LEAPS:
The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options
having a maturity of up to three years.
7. Baskets: Basket options are options on portfolios of underlying assets. The underlying
asset is usually a moving average or a basket of assets. Equity index options are a form of
basket options.
Types of Traders in Derivatives Market:
1. Hedgers
Hedgers are interested in reducing a risk that they already face. The purpose of hedging is
to make the outcome more certain. It does not necessarily improve the outcome.
2. Speculators
Whereas hedgers want to eliminate an exposure to movements in the price of assets,
speculators wish to take a position in the market. Either they are betting that a price will go
up or they are betting that it will go down. Speculating using futures market provides an
investor with a much higher level of leverage than speculating using spot market. Options
also give extra leverage.
3. Arbitrageurs
They are a third important group of participants in derivatives market. Arbitrage involves
locking in a riskless profit by entering simultaneously into transactions in two or more
markets. Arbitrage is sometimes possible when the futures price of an asset gets out of line
with its cash price.

CHAPTER
3
DEVELOPMENT OF
DERIVATIVES MARKET IN INDI

CH 3 DEVELOPMENT OF DERIVATIVES MARKET IN INDIA
The first step towards introduction of derivatives trading in India was the promulgation of
the Securities Laws(Amendment) Ordinance, 1995, which withdrew the prohibition on
options in securities. The market for derivatives, however, did not take off, as there was no
regulatory framework to govern trading of derivatives. SEBI set up a 24–member
committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop
appropriate regulatory framework for derivatives trading in India. The committee
submitted its report on March 17, 1998 prescribing necessary pre–conditions for
introduction of derivatives trading in India. The committee recommended that derivatives
should be declared as ‘securities’ so that regulatory framework applicable to trading of
‘securities’ could also govern trading of securities. SEBI also set up a group in June 1998
under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk containment
in derivatives market in India. The report, which was submitted in October 1998, worked
out the operational details of margining system, methodology for charging initial margins,
broker net worth, deposit requirement and real–time monitoring requirements.
The Securities Contract Regulation Act (SCRA) was amended in December 1999 to
Include derivatives within the ambit of ‘securities’ and the regulatory framework was
developed for governing derivatives trading. The act also made it clear that derivatives
shall be legal and valid only if such contracts are traded on a recognized stock exchange,
thus precluding OTC derivatives. The government also rescinded in March 2000, the
three–decade old notification, which prohibited forward trading in securities.
Derivatives trading commenced in India in June 2000 after SEBI granted the final approval
to this effect in May 2001. SEBI permitted the derivative segments of two stock
exchanges, NSE and BSE, and their clearing house/corporation to commence trading and
settlement in approved derivatives contracts. To begin with, SEBI approved trading in
index futures contracts based on S&P CNX Nifty and BSE–30(Sensex) index. This was
followed by approval for trading in options based on these two indexes and options on
individual securities.
The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options
on individual securities commenced in July 2001. Futures contracts on individual stocks
were launched in November 2001. The derivatives trading on NSE commenced with S&P
CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on
June 4, 2001 and trading in options on individual securities commenced on July 2, 2001.
Single stock futures were launched on November 9, 2001. The index futures and options
contract on NSE are based on S&P CNX.
Trading and settlement in derivative contracts is done in accordance with the rules,
byelaws, and regulations of the respective exchanges and their clearing house/corporation
duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors
(FIIs) are permitted to trade in all Exchange traded derivative products.
Measures specified by SEBI to protect the rights of investor in the Derivative Market

1. Investor's money has to be kept separate at all levels and is permitted to be
used only against the liability of the Investor and is not available to the trading
member or clearing member or even any other investor.
2. The Trading Member is required to provide every investor with a risk
disclosure document which will disclose the risks associated with the derivatives
trading so that investors can take a conscious decision to trade in derivatives.
3. Investor would get the contract note duly time stamped for receipt of the
order and execution of the order. The order will be executed with the identity of the
client and without client ID order will not be accepted by the system. The investor
could also demand the trade confirmation slip with his ID in support of the contract
note. This will protect him from the risk of price favour, if any, extended by the
Member.
4. In the derivative markets all money paid by the Investor towards margins on
all open positions is kept in trust with the Clearing House/Clearing corporation and in
the event of default of the Trading or Clearing Member the amounts paid by the
client towards margins are segregated and not utilised towards the default of the
member. However, in the event of a default of a member, losses suffered by the
Investor.

CHAPTER
RESEARCH
METHODOLOGY

CH 4 RESEARCH METHODOLOGY
Objectives
To determine the short term trend of nifty future using the important derivatives market
indicators like Open interest and Put Call ratio.
To determine the derivatives trading strategy on the basis of different market outlooks
which will minimize the risk exposure and at the same times will maximize the profits.
Scope of study
We have done the study of nifty futures only.
We have studied the short term trend of nifty futures for the month of Feb, 2010 only.
We have used two important indicators Open Interest and Put-Call Ratio only to determine
the trend of Nifty.
Data collection sources
Primary –No
Secondary
• Various stock market web sites
• Magazines
• Capitaline Neo software
• Odin diet Software
Beneficiaries of study
• Derivative traders
• Hedge funds
• Institutional investors
• Arbitragers
• Hedger
• Speculators
• Jobbers
• Investors
Limitations

• We have taken only Nifty futures for the purpose of study and not any other stock.
• The period of study is only one month derivative contract which may not give the
same result every time.
• We have use only two indicators namely Open Interest and Put-Call ratio to
determine the trend of Nifty.
• Few of the strategies prescribed in the study may give unlimited loss if the market
goes other way round.
CHAPTER
STOCK MARKET
DERVATIVES

CH 5 Stock Market Derivatives
Futures & Options
In India, the National Stock Exchange of India Limited (NSE) commenced trading in
derivatives with the launch of index futures on June 12, 2000. The futures contracts are
based on the popular benchmark S&P CNX Nifty Index.
The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001.
NSE also became the first exchange to launch trading in options on individual securities
from July 2, 2001.
Futures on individual securities were introduced on November 9, 2001. Futures and
Options on individual securities are available on 180 securities stipulated by SEBI.
Instruments available in India
The National stock Exchange (NSE) has the following derivative products:
Index Futures Futures on Options on

Index
Products Individual Individual
Options
Securities Securities
180 securities 180 securities
Underlying S&P CNX
S&P CNX Nifty stipulated by stipulated by
Instrument Nifty
SEBI SEBI
Type European American
Trading Maximum of 3-month Same as Same as index Same as
Cycle trading cycle. At any index futures futures index futures
point in time, there will
be 3 contracts
available :

1) near month,
2) mid month &
3) far month
Last Thursday of the Same as Same as index Same as
Expiry Day
expiry month index futures futures index futures
As stipulated
As stipulated by
Permitted lot size is 200 Same as by NSE (not
Contract Size NSE (not less
& multiples thereof index futures less than Rs.2
than Rs.2 lacs)
lacs)
BSE also offers similar products in the derivatives segment
• Minimum contract size
The Standing Committee on Finance, a Parliamentary Committee, at the time of

recommending amendment to Securities Contract (Regulation) Act, 1956 had
recommended that the minimum contract size of derivative contracts traded in the
Indian Markets should be pegged not below Rs. 2 Lakhs. Based on this
recommendation SEBI has specified that the value of a derivative contract should
not be less than Rs. 2 Lakh at the time of introducing the contract in the market.
• Lot size of a contract
Lot size refers to number of underlying securities in one contract. Additionally, for
stock specific derivative contracts SEBI has specified that the lot size of the
underlying individual security should be in multiples of 100 and fractions, if any,
should be rounded of to the next higher multiple of 100. This requirement of SEBI
coupled with the requirement of minimum contract size forms the basis of arriving
at the lot size of a contract.
For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum
contract size is Rs.2 lacs, then the lot size for that particular scripts stands to be
200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.

CHAPTER
6
INTRODUCTION TO
FUTURES

CH 6 INTRODUCTION TO FUTURES
Introduction of futures in India
The first derivative product introduced in the Indian securities market was “INDEX
FUTURES" in June 2000. In India the “STOCK FUTURES” were first introduced on
November 9, 2001 how Futures Markets Came About
Many people see pictures of the large crowd of traders standing in a crowd yelling and
signaling with their hands, holding pieces of paper, and writing frantically. To the outsider,
it looks like chaos. But do you really think that there is in fact chaos going on in the worlds
futures pits? Not a chance. Actually, everyone in the crowd knows exactly what's going on.
It is in fact, another language. Learn the language and you know what is going on.
How does this differ from the way things operated in the 'old days'? Before there were
organized grain and commodity markets, farmers would bring their harvested crops to
major population centers. There they would search for buyers. There were no storage
facilities; and many times the harvest would rot before buyers were found. Also, because
many farmers would bring their crops to market at the same time, the price of the crops or
commodities would be driven down. There was tremendous supply in relation to demand.
The reverse was true in the spring. Many times there would be a shortage of crops and
commodities and the price would rise sharply.
Futures prices and the bid and asked price are continuously transmitted throughout the
world electronically. Regardless of what geographic location the speculator or hedger is
located in, he has the same access to price information as everyone else. Farmers, bankers,
manufacturers, corporations, all have equal access. All they have to do is call their broker
and arrange for the purchase or sale of a futures contract. The person who takes the
opposite side of your trade may be a competitor who has a different outlook on the future
price, it may be a floor broker, or it could be a speculator.
Types of Futures
Agricultural
The first type of agricultural contract is the grains. This group includes corn, oats, and
wheat. The second type of agricultural contract is the oils and meal. This group includes
soybeans, soya meal, soya oil, sunflower seed oil, and sunflower seed. The third group of
agricultural commodities is livestock. This group includes live hogs, cattle, and pork
bellies. The fourth type of agricultural commodities is the forest products group. For each
of these commodities there are different contract months available. There are also different
grades available. And there are different types of the commodity available. Contract
months generally revolve around the harvest cycle. More actively traded commodities
usually have more contract months available. Almost every month a new type of contract
appears to meet the needs of a continuously growing corporate and institutional market.

Metallurgical
The group of metallurgical commodities includes the metals and the petroleum's. The
metals group includes gold, silver, copper, palladium, and platinum. The petroleum group
includes crude oil, gasoline, heating oil, and propane. Different contract months, grades,
amounts, and types, of these contracts are available. Almost every month a new type of
contract appears to meet the needs of a continuously growing corporate and institutional
market.
Interest Bearing Assets

This group of futures began trading in 1975. Yet it is this group that has seen the most
explosive growth. This group of futures contracts includes Treasury Bills, Treasury Bonds,
Treasury Notes, Municipal Bonds, and Eurodollar Deposits. The entire yield curve is
represented and it is possible to trade these instruments with tremendous flexibility as to
maturity.
Indexes
Today, there are futures on most major indexes. The S&P 500, New York Stock Exchange
Composite, New York Stock Exchange Utilities Index, Commodities Research Bureau
(CRB), Russell 2000, S&P 400 Midcap, Value Line, and the FT-Se 100 Index (London).
Stock index futures are settled in cash. There is no actual delivery of a good. The only
possibility for the trader to settle his positions is to buy or sell an offsetting position or in
cash at expiration. Almost every month a new type of contract appears to meet the needs of
a continuously growing corporate and institutional market.
Foreign Currencies
In the 1970's when freely floating exchange rates were established it became possible to
trade foreign currencies. Most major foreign currencies are traded. The principal currencies
traded are the Canadian dollar, Japanese yen, British pound, Swiss franc, French franc,
Eurodollar, Euromark, and the Deutsch mark. The forward market in currencies is much
larger than the foreign exchange futures market. Additionally, there is now cross currency
futures that trade. Examples of these are the Deutsch mark/French franc and the Deutsch
mark/yen. Almost every month a new type of contract appears to meet the needs of a
continuously growing corporate and institutional market.
Miscellaneous
Today, the number and variety of futures contracts that trade increase every month.
Catastrophe insurance, cheddar cheese, cocoa, coffee, sugar, orange juice, diammonium
phosphate (fertilizer), and anhydrous ammonia. Most of the contracts that trade which are
not very liquid, and which one would never trade, are very useful to certain parties.

Generally, these are corporations, which are using these contracts to hedge positions. They
use them primarily to lock in a pre-determined price for their cost of goods and offset risk.
Because many of these commodities are not liquid, they are poor selections for the
speculator to bet on.
The Indian capital market has grown quite well in the last decade. In the boom period of
1992 and thereafter, even the common man living in a village was attracted to the stock
market. The stock market was considered a profitable investment opportunity. Before July
2001, various stock exchanges including the BSE, NSE, and the Delhi Stock Exchange
(DSE), provided carry forward facilities through the traditional badla system. By means of
this system the purchase or sale of a security was not postponed till a particular future date;
instead the system only provided for the carry forward of a transaction from one settlement
period (seven days) to the next settlement period for the payment of a fee known as badla
charges.
Features
Every futures contract is a forward contract. They:
• Are entered into through exchange, traded on exchange and clearing
corporation/house provides the settlement guarantee for trades.
• Are of standard quantity; standard quality (in case of commodities).
• Have standard delivery time and place.
Frequently used terms in futures market
• Contract Size – It specifies the amount of the asset that has to be delivered under
one contract.
• Multiplier - It is a pre-determined value, used to arrive at the contract size. It is the
price per index point.
• have only cash settlement system.
Concept of basis in futures market
• Basis is defined as the difference between cash and futures prices:

Basis = Cash prices - Future prices.
• Basis can be either positive or negative (in Index futures, basis generally is
negative).
• Basis may change its sign several times during the life of the contract.
• Basis turns to zero at maturity of the futures contract i.e. both cash and future prices
converge at maturity.
Sensex Futures
Sensex Futures are futures whose underlying asset is the stock market index. The index is
an indicator of the broad market which reflects stock market movements. It is one of the
oldest and reliable barometers of the Indian Stock Market; it provides time series data over
a fairly long period of time. The Sensex enables one to effectively gauge stock market

movements. The BSE 30 Sensex was first compiled in 1986 and is the market
capitalization weighted index of 30 scripts which represents 30 large well-established and
financially sound companies. The Sensex represents a broad spectrum of companies in a
variety of industries. It represents 14 major industry groups which are large enough to be
used for effective hedging. Given the lower cost structure and the overwhelming popularity
of the Sensex, Sensex futures are expected to garner large volumes. The Sensex is the first
index to be launched by any Stock Exchange in India and has the the largest social recall
attached with it.
The Indian market is witnessing low volumes as it is in its nascent stages of growth. Retail
participation will improve with better understanding and comfort with the product whereas
the market is yet to witness institutional participation. FIIs have not been able to participate
as they are still awaiting certain clarifications pertaining to margins from the Reserve Bank
of India.
Why Sensex Futures?
Sensex futures are expected to evolve as the most liquid contract in the country. This is
because Institutional investors in India and abroad, money managers and small investors
use the Sensex when it comes to describing the mood of the Indian Stock markets. Thus is
has been observed that the Sensex is an effective proxy for the Indian stock markets.
Higher liquidity in the product essentially translates to lower impact cost of trading in
Sensex futures. The arbitrage between the futures and the equity market is further expected
to reduce impact cost. Trading in Stock index futures is likely to be pre-dominantly retail
driven. Internationally, stock index futures are an institutional product with 60% of the
volumes generated from hedging needs. Immense retail participation to the extent of 80 -
90% is expected in India based on the following factors:
• Stock Index Futures require lower capital adequacy and margin requirements when
compared to margins on carry forward of individual scripts.
• Index futures have lower brokerage costs.
• Savings in cost is possible through reduced bid-ask spreads where stocks are traded
in packaged forms.
• The impact cost will be much lower in case of stock index futures as opposed to
dealing in individual scripts.
• The chances of manipulation are much lesser since the market is conditioned to
think in terms of the index and therefore would prefer to trade in stock index
futures.
The Stock index futures are expected to be extremely liquid given the speculative nature of
our markets and the overwhelming retail participation expected to be fairly high. In the
near future, stock index futures will definitely see incredible volumes in India. It will be a
blockbuster product and is pitched to become the most liquid contract in the world in terms
of number of contracts traded if not in terms of notional value.

The advantage to the equity or cash market is in the fact that they would become less
volatile as most of the speculative activity would shift to stock index futures. The stock
index futures market should ideally have more depth, volumes and act as a stabilizing
factor for the cash market. However, it is to early to base any conclusions on the volume or
to form any firm trend.
Interpreting Futures Data
Derivatives market data is available on the Derivatives Trading and Settlement System
(DTSS) under the head market summary. This terminal is provided to all members of the
Derivatives Segment. Non-members can have access to the same information via the
financial newspapers or from the Daily Official List of the Stock Exchange.
Theoretical way of Pricing Index Futures
The theoretical way of pricing any Future is to factor in the current price and holding costs
or cost of carry.
In general, the Futures Price = Spot Price + Cost of Carry
Cost of carry is the sum of all costs incurred if a similar position is taken in cash market
and carried to maturity of the futures contract less any revenue which may result in this
period. The costs typically include interest in case of financial futures (also insurance and
storage costs in case of commodity futures). The revenue may be dividends in case of
index futures.
S&P CNX Nifty Futures
A futures contract is a forward contract, which is traded on an Exchange. NSE commenced

trading in index futures on June 12, 2000. The index futures contracts are based on the
popular market benchmark S&P CNX Nifty index.
NSE defines the characteristics of the futures contract such as the underlying index, market
lot, and the maturity date of the contract. The futures contracts are available for trading
from introduction to the expiry date.
• Contract Specifications
• Trading Parameters

Contract Specifications
Security descriptor
The security descriptor for the S&P CNX Nifty futures contracts is:
Market type : N
Instrument Type : FUTIDX
Underlying : NIFTY
Expiry date : Date of contract expiry
Instrument type represents the instrument i.e. Futures on Index.
Underlying symbol denotes the underlying index which is S&P CNX Nifty
Expiry date identifies the date of expiry of the contract
Underlying Instrument
The underlying index is S&P CNX NIFTY.
Trading cycle
S&P CNX Nifty futures contracts have a maximum of 3-month trading cycle - the near
month (one), the next month (two) and the far month (three). A new contract is introduced
on the trading day following the expiry of the near month contract. The new contract will
be introduced for three month duration. This way, at any point in time, there will be 3
contracts available for trading in the market i.e., one near month, one mid month and one
far month duration respectively.
Expiry day
S&P CNX Nifty futures contracts expire on the last Thursday of the expiry month. If the
last Thursday is a trading holiday, the contracts expire on the previous trading day.
Trading Parameters
Contract size
The permitted lot size of S&P CNX Nifty futures contracts is 200 and multiples thereof
Base Prices
Base price of S&P CNX Nifty futures contracts on the first day of trading would be the
previous day’s closing Nifty value. The base price of the contracts on subsequent trading
days would be the daily settlement price of the futures contracts.
Price bands
There are no day minimum/maximum price ranges applicable for S&P CNX Nifty futures
contracts. However, in order to prevent erroneous order entry by trading members,
operating ranges are kept at + 10 %. In respect of orders which have come under price
freeze, members would be required to confirm to the Exchange that there is no inadvertent

error in the order entry and that the order is genuine. On such confirmation the Exchange
may approve such order.
Futures on Individual Securities
A futures contract is a forward contract, which is traded on an Exchange. NSE commenced

trading in futures on individual securities on November 9, 2001. The futures contracts are
available on 31 securities stipulated by the Securities & Exchange Board of India (SEBI).
(Selection criteria for securities)
NSE defines the characteristics of the futures contract such as the underlying security,
market lot, and the maturity date of the contract. The futures contracts are available for
trading from introduction to the expiry date.
Security descriptor
The security descriptor for the futures contracts is:

Market type : N
Instrument Type : FUTSTK
Underlying : NIFTY
Futures contracts are available on 31 securities stipulated by the Securities & Exchange
Board of India (SEBI). These securities are traded in the Capital Market segment of the
Exchange.
Trading cycle
Futures contracts have a maximum of 3-month trading cycle - the near month (one), the
next month (two) and the far month (three). New contracts are introduced on the trading
day following the expiry of the near month contracts. The new contracts are introduced for
three month duration. This way, at any point in time, there will be 3 contracts available for
trading in the market (for each security) i.e., one near month, one mid month and one far
month duration respectively.
Expiry day
Futures contracts expire on the last Thursday of the expiry month. If the last Thursday is a
trading holiday, the contracts expire on the previous trading day.
Trading Parameters

Contract size
The permitted lot size for the futures contracts on individual securities shall be the same as
the same lot size of options contract for a given underlying security or such lot size as may
be stipulated by the Exchange from time totime.
The value of the option contracts on individual securities may not be less than Rs. 2 lakhs
at the time of introduction. The permitted lot size for the options contracts on individual
securities would be in multiples of 100 and fractions if any shall be rounded off to the next
higher multiple of 100.
Base Prices
Base price of futures contracts on the first day of trading (i.e. on introduction) would be the
previous day’s closing value of the underlying security.
Price bands
There are no day minimum/maximum price ranges applicable for futures contracts.
However, in order to prevent erroneous order entry by trading members, operating ranges
are kept at + 20 %. In respect of orders which have come under price freeze, members
would be required to confirm to the Exchange that there is no inadvertent error in the order
entry and that the order is genuine. On such confirmation the Exchange may approve such
order.
DIFFERENCE BETWEEN FUTURES AND OPTIONS
Although exchange-traded futures and options may act as substitutes for each other, they
have some crucial differences. In futures, the risk exposure and profit potential are
unlimited for both the parties, while in options, risk exposure is unlimited and profit
potential limited for the sellers, and it is the other way round for the buyers. The maturity
of contracts is longer in futures than in options. In futures, there is no premium paid or
received by any party, while in options the buyers have to pay a premium to the sellers.
While Futures impose obligations on both the parties, options do so only on the sellers.
Both the parties have to put in margins in futures trading, but only the sellers have to do so
in options trading.
STOCK INDICES IN INDIAN STOCK MARKET
A stock price moves for two possible reasons news about the company or stock (such as
strike in the factory, grant of a major contract or new product launch) or news about the
economy (such as growth in the economy, are related budget announcement or a war or
warlike situation). The job of an index is to capture the movement of the stock market with
reference to news about the economy and the country. Each stock movement contains the
mixture of two elements, stock news and index news. The most important stock market

indices on which index futures contracts have been introduced are the S & P CNX nifty
and the BSE sensex.
Margin Money
The aim of margin money is to minimize the risk of default by either counter-party. The
payment of margin ensures that the risk is limited to the previous day’s price movement on
each Margin money is like a security deposit or insurance against a possible Future loss of
value.
Different Types of Margin

Yes, there can be different types of margin like Initial Margin, Variation margin,
Maintenance margin and Additional margin.
Objective of Initial Margin

The basic aim of Initial margin is to cover the largest potential loss in one day. Both buyer
and seller have to deposit margins. The initial margin is deposited before the opening of
the day of the Futures transaction. Normally this margin is calculated on the basis of
variance observed in daily price of the underlying (say the index) over a specified
historical period (say immediately preceding 1 year). The margin is kept in a way that it
covers price movements more than 99% of the time. Usually three sigma (standard
deviation) is used for this measurement. This technique is also called value at risk (or
VAR).Based on the volatility of market indices in India, the initial margin is expected to be
around 8-10%.
Variation or Mark-to-Market Margin

All daily losses must be met by depositing of further collateral - known as variation
margin, which is required by the close of business, the following day. Any profits on the
contract are credited to the client’s variation margin account.
Maintenance Margin
Some exchanges work on the system of maintenance margin, which is set at a level slightly
less than initial margin. The margin is required to be replenished to the level of initial
margin, only if the margin level drops below the maintenance margin limit. For e.g.. If
Initial Margin is fixed at 100 and Maintenance margin is at 80, then the broker is permitted
to trade till such time that the balance in this initial margin account is 80 or more. If it
drops below 80, say it drops to 70, and then a margin of 30 (and not 10) is to be paid to
replenish the levels of initial margin. This concept is not expected to be used in India.
Additional Margin

In case of sudden higher than expected volatility, additional margin may be called for by
the exchange. This is generally imposed when the exchange fears that the markets have
become too volatile and may result in some crisis, like payments crisis, etc. This is a
preemptive move by exchange to prevent breakdown.
Cross Margining
This is a method of calculating margin after taking into account combined positions in
Futures, options, cash market etc. Hence, the total margin requirement reduces due to
cross-Hedges. This is unlikely to be introduced in India immediately.
SETTLEMENT OF INDEX FUTURES CONTRACT
Stock index futures transactions are settled by cash delivery. No physical delivery of stock
is given by the short. The long also does not make payment for the full value. In case of
Nifty futures contract, the last trading day is the last Thursday of the contract’s expiring
month. The amount is determined by referring to the cash price at the close of trading in
the cash market on the last trading day in the futures contract.

CHAPTER
7
INTRODUCTION TO
OPTION

CH 7 INTRODUCTION TO OPTIONS
As its name signifies, an option is the right to buy or sell a particular asset for a limited
time at a specified rate. These contracts give the buyer a right, but do not impose an
obligation, to buy or sell the specified asset at a set price on or before a specified date.
Today, options are traded not only in commodities, but in all financial assets such as
treasury bills (T-bills), forex, stocks and stock indices.
Four Components to an Option

There are four components to an option. They are: The underlying security, the type of
option (put or call), the strike price, and the expiration date. Let's take an XYZ November
100-call option as an example. XYZ is the underlying security. November is the expiration
month. 100 is the strike price (sometimes referred to as the exercise price). And the option
is a call (the holder has the right, not the obligation, to buy 100 shares of XYZ at a price of
100).
The Parties to an Option
There are two parties to an option. There is the party who buys the option; and there is the
party who sells the option. The party who sells the option is the writer. The party who
writes the option has the obligation to fulfill the terms of the contract need to it be
exercised. This can be done by delivering to the appropriate broker 100 shares of the
underlying security for each option written.
Types of Option Contracts

The options are of two styles. 1) European option and
2) American option
An American style option is the one, which can be exercised by the buyer on or before the
expiration date, i.e. anytime between the day of purchase of the option and the day of its
expiry. The European kind of option is the one that can be exercised by the buyer on the
expiration day only and not anytime before that.
The options are of two types. 1) Call option and

2) Put option.
Call Option
A call option gives the holder/buyer, the right to buy specified quantity of the underlying
asset at the strike price on or before expiration date. The seller however, has the obligation
to sell the underlying asset if the buyer of the call option decides to exercise his option to
buy. One can buy call option when he or she expects the market to be bullish and sell call
option when he or she expects the market to be bearish.

Example: An investor buys one European call option on Infosys at the strike price of
Rs.3500 at a premium of Rs.100. If the market price of Infosys on the day of expiry is
more than Rs.3500, the option will be exercised. The investor will earn profits once the
share price crosses Rs.3600. Suppose stock price is Rs.3800, the option will be exercised
and the investor will buy 1 share of Infosys from the seller of the option at Rs.3500 and
sell it in the market at Rs.3800 making a profit of Rs.200.
Put Option
A put option gives the buyer the right to sell specified quantity of the underlying asset at
the strike price on or before an expiry date. The seller of the put option however, has the
obligation to buy the underlying asset at the strike price if the buyer decides to exercise his
options to sell. One can buy put option when he or she expects the market to be bearish and
sell put option when he or she expects the market to be bullish.
Example: An investor buys one European put option on Reliance at the strike price of
Rs.300 at a premium of Rs.25. If the market price of Reliance on the day of expiry is less
than Rs.300, the option will be exercised. The investor will earn profits once the share
price goes below 275. Suppose stock price is Rs.260, the buyer of the put option
immediately buys Reliance share in the market @ Rs.260 and exercises his option selling
the Reliance share at Rs.300 to the option writer thus making a net profit of Rs.15.
In-the-Money, At-the-Money, Out-the-Money
An option is said to be ‘at-the-money’, when the option’s strike price is equal to the
underlying asset price. This is true for both puts and calls.
A call option is said to be in-the-money when the strike price of the option is less than the
underlying asset price. On the other hand, a call option is out-of-the-money when the strike
price is greater than the underlying asset price
A put option is in-the-money when the strike price of the option is greater than the spot
price of the underlying asset. A put option is out-the-money when the strike price is less
than the spot price of underlying asset.
Options are said to be deep in-the-money (or deep out-the-money) if exercise price is at
significant variance with the underlying asset price.
CALL OPTION PUT OPTION

In-the-money Strike price < spot price Strike price > spot price
At-the-money Strike price = spot price Strike price = spot price
Out-the-money Strike price > spot price Strike price < spot price
Stock index options

• The stock index options are options where the underlying asset is a stock Index.
• For Example: Options on S&P 500 Index/ options on BSE Sensex etc.
Options on individual stocks

• Options contracts where the underlying asset is an equity stock, are termed as
options on stocks.
• They are mostly American style options cash settled or settled by physical delivery.
Frequently used terms in options market
• Underlying- The specific security/ asset on which an options contract is based.

• Option premium – this is the price paid by the buyer to the seller to acquire the
right to buy or sell.
• Strike price or exercise price – the strike or exercise price of an option is the
specified / pre-determined price of the underlying asset at which the same can be
bought or sold if the option buyer exercises his right to buy/ sell on or before the
expiration day.
• Expiration date – is the date on which the option expires. On expiration date, either
the option is exercised or it expires worthless.
• Exercise date – is the date on which the option is actually exercised.
• Open interest – the total number of options contracts outstanding in the market at
any given point of time.
• Option holder – is the one who buys an option which can be a call or a put option.
Option value
An option premium or the value of the option can be broken into two parts:
1. Intrinsic value and
2. Time value.
The intrinsic value of an option is defined as the amount by which an option is in-the-
money or the immediate exercise value of the option when the underlying position is
marked-to-market.
For a call option: Intrinsic Value = spot price – strike price
For a put option: Intrinsic Value = strike price - spot price
Factors affecting the value of an option (premium)
There are two types of factors that affect the value of the option premium:

1) Quantifiable factors:
• Underlying stock price

• The strike price of the option
• The volatility of the underlying stock
• The time to expiration
• The risk free interest rate.
2) Non-Quantifiable Factors:
• Market participants’ varying estimates of the underlying asset’s future

volatility
• Individuals’ varying estimates of future performance of the underlying
asset, based on fundamental or technical analysis.
• The effect of supply and demand- both in the options marketplace and in
the market for the underlying asset.
Effect of various factors on option value
As discussed earlier we know that the option price is affected by different factors. In this
section, the effect of various factors is shown in the following table:
Component of
Factor Option Type Impact on Option Value
Option Value
Share price moves Option Value will also move

Call Option Intrinsic Value
up up
Share price moves

Call Option Option Value will move down Intrinsic Value
down
Share price moves

Put Option Option Value will move down Intrinsic Value
up
Share prices moves

Put Option Option Value will move up Intrinsic Value
down
Time to expire is
Call Option Option Value will be high Time Value
high
Time to expire is
Call Option Option Value will be low Time Value
low
Tim e to expire is Put Option Option Value will be high Time Value

high
Time to expire is
Put Option Option Value will be low Time Value
low
Volatility is high Call Option Option Value will be high Time Value
Volatility is low Call Option Option Value will be low Time Value
Margins
When call and put options are purchased, the option price must be paid in full. Investors
are not allowed to buy options on margin. This is because options already contain
substantial leverage. However the option seller needs to maintain funds in a margin
account. This is because the broker and the exchange need to be satisfied that the investor
will not default if the option is exercised. The size of the margin required depends on the
circumstances.
Different pricing models for options
The theoretical option pricing models are used by option traders for calculating the fair
value of an option on the basis of the earlier mentioned influencing factors. An option
pricing model assists the trader in keeping the price of calls and puts in proper numerical
relationship to each other and helping the trader make bids and offer quickly. The two most
popular potion pricing models are
• Black Scholes Model which assumes that percentage change in the price of
underlying follows a normal distribution.
• Binomial Model which assumes that percentage change in price of the underlying
follows a binomial distribution.
Who decides on the premium paid on options & how is it calculated?
Options premium is not fixed by the Exchange. The fair value/ theoretical price of an
option can be known with the help of pricing models and then depending on market
conditions the price is determined by competitive bids and offers in the trading
environment. An option’s premium/ price is the sum of intrinsic value and time value
(explained above). If the price of the underlying stock is held constant, the intrinsic value
portion of an option premium will remain constant as well.
Advantages of options
Besides offering flexibility to the buyer in form of right to buy or sell, the major advantage
of options is their versatility. They can be as conservative or as speculative as one’s
investment strategy dictates.

Some of the benefits of options are as under:
• High leverage as by investing small amount of capital (in form of premium), one
can take exposure in the underlying asset of much greater value.
• Pre-known maximum risk for an option buyer.
• Large profit potential and limited risk for option buyer.
• an investor knows that no matter how far the stock drops, it can be sold at the strike
price of the put anytime until the put expires.
Risk and gains involved in options

• The risk/loss of an option buyer is limited to the premium that he has paid whereas
his gains are unlimited.
• The risk of an option writer is unlimited where his gains are limited to the
premiums earned.
• When a physical delivery uncovered call is exercised upon, the writer will have to
purchase the underlying asset and his loss will be the excess of the purchase price
over the exercise price of the call reduced by the premium received for writing the
call.
S&P CNX Nifty Options
An option gives a person the right but not the obligation to buy or sell something. An
option is a contract between two parties wherein the buyer receives a privilege for which
he pays a fee (premium) and the seller accepts an obligation for which he receives a fee.
The premium is the price negotiated and set when the option is bought or sold. A person
who buys an option is said to be long in the option. A person who sells (or writes) an
option is said to be short in the option.
NSE introduced trading in index options on June 4, 2001. The options contracts are
European style and cash settled and are based on the popular market benchmark S&P CNX
Nifty index.
Security descriptor
The security descriptor for the S&P CNX Nifty options contracts is:
Market type : N
Instrument Type : OPTIDX
Underlying : NIFTY
Option Type : CE/ PE
Strike Price: Strike price for the contract

The underlying index is S&P CNX NIFTY.
Trading cycle
S&P CNX Nifty options contracts have a maximum of 3-month trading cycle - the near
month (one), the next month (two) and the far month (three). On expiry of the near month
contract, new contracts are introduced at new strike prices for both call and put options, on
the trading day following the expiry of the near month contract. The new contracts are
introduced for three month duration.
Expiry day
S&P CNX Nifty options contracts expire on the last Thursday of the expiry month. If the
last Thursday is a trading holiday, the contracts expire on the previous trading day.
Strike Price Intervals
The Exchange provides a minimum of five strike prices for every option type (i.e. call &
put) during the trading month. At any time, there are two contracts in-the-money (ITM),
two contracts out-of-the-money (OTM) and one contract at-the-money (ATM).
Trading Parameters
Contract size
The permitted lot size of S&P CNX Nifty options contracts is 50 and multiples thereof
Price bands
There are no day minimum/maximum price ranges applicable for options contracts.
However, in order to prevent erroneous order entry, operating ranges and day
minimum/maximum ranges for options contract are kept at 99% of the base price. In view
of this, members will not be able to place orders at prices which are beyond 99% of the
base price
Options on Individual Securities
An option gives a person the right but not the obligation to buy or sell something. An
option is a contract between two parties wherein the buyer receives a privilege for which
he pays a fee (premium) and the seller accepts an obligation for which he receives a fee.
The premium is the price negotiated and set when the option is bought or sold. A person

who buys an option is said to be long in the option. A person who sells (or writes) an
option is said to be short in the option.
NSE became the first exchange to launch trading in options on individual securities.
Trading in options on individual securities commenced from July 2, 2001. Option contracts
are American style and cash settled and are available on 31 securities stipulated by the
Securities & Exchange Board of India (SEBI). (Selection criteria for securities)
Security descriptor
The security descriptor for the options contracts is:
Market type : N
Instrument Type : OPTSTK
Underlying : Symbol of underlying security
Option Type : CA / PA
Strike Price: Strike price for the contract
Option contracts are available on 31 securities stipulated by the Securities & Exchange
Board of India (SEBI). These securities are traded in the Capital Market segment of the
Exchange.
Trading cycle
Options contracts have a maximum of 3-month trading cycle - the near month (one), the
next month (two) and the far month (three). On expiry of the near month contract, new
contracts are introduced at new strike prices for both call and put options, on the trading
day following the expiry of the near month contract. The new contracts are introduced for
three month duration.
Expiry day
Options contracts expire on the last Thursday of the expiry month. If the last Thursday is a
trading holiday, the contracts expire on the previous trading day.
Strike Price Intervals

The Exchange provides a minimum of five strike prices for every option type (i.e. call &
put) during the trading month. At any time, there are two contracts in-the-money (ITM),
two contracts out-of-the-money (OTM) and one contract at-the-money (ATM).
The strike price interval would be:
Price of Underlying Strike Price interval (Rs.)

Less than or equal to Rs. 50 2.50
>Rs.50 to < Rs150 5
> Rs.150 to < Rs.250 10
> Rs.250 to < Rs.500 20
> Rs.500 to < Rs.1000 30
> Rs.1000 to < Rs.2500 50
>Rs.2500 100
New contracts with new strike prices for existing expiration date are introduced for trading
on the next working day based on the previous day's underlying close values, as and when
required. In order to decide upon the at-the-money strike price, the underlying closing
value is rounded off to the nearest strike price interval.
The in-the-money strike price and the out-of-the-money strike price are based on the at-
the-money strike price interval.
Trading Parameters
Contract size
The value of the option contracts on individual securities may not be less than Rs. 2 lakhs
at the time of introduction. The permitted lot size for the options contracts on individual
securities would be in multiples of 100 and fractions if any, shall be rounded off to the next
higher multiple of 100.
Price bands
There are no day minimum/maximum price ranges applicable for options contracts.
However, in order to prevent erroneous order entry, operating ranges and day
minimum/maximum ranges for options contracts are kept at 99% of the base price. In view
of this, members will not be able to place orders at prices which are beyond 99% of the

base price. Members desiring to place orders in option contracts beyond the day min-max
range would be required to send a request to the Exchange. The base prices for option
contracts may be modified, at the discretion of the Exchange, based on the request received
from trading members.
How does option get settled?

Option is a contract which has a market value like any other tradable commodity. Once an
option is bought there are following alternatives that an option holder has:
• One can sell an option of the same series as the one had bought and close
out/square off his/ her position in that option at any time on or before the
expiration.
• One can exercise the option on the expiration day in case of European option or; on
or before the expiration day in case of an American option. In case the option is
‘out of money’ at the time of expiry, it will expire worthless.
Settlement Mechanism:
Options Contracts on Index or Individual Securities
Daily Premium Settlement
Premium settlement is cash settled and settlement style is premium style. The premium
payable position and premium receivable positions are netted across all option contracts for
each (Clearing Member) CM at the client level to determine the net premium payable or
receivable amount, at the end of each day.
Final Exercise Settlement
Final Exercise settlement is effected for option positions at in-the-money strike prices
existing at the close of trading hours, on the expiration day of an option contract. Long
positions at in-the money strike prices are automatically assigned to short positions in
option contracts with the same series, on a random basis.
For index options contracts, exercise style is European style, while for options contracts on
individual securities, exercise style is American style. Final Exercise is Automatic on
expiry of the option contracts.
Option contracts, which have been exercised, shall be assigned and allocated to Clearing
Members at the client level.
Exercise settlement is cash settled by debiting/ crediting of the clearing accounts of the
relevant Clearing Members with the respective Clearing Bank.
Final settlement loss/ profit amount for option contracts on Index is debited/ credited to the
relevant CMs clearing bank account on T+1 day (T = expiry day).

Final settlement loss/ profit amount for option contracts on Individual Securities is debited/
credited to the relevant CMs clearing bank account on T+3 day (T = expiry day).
Open positions, in option contracts, cease to exist after their expiration day. The pay-in /
pay-out of funds for a CM on a day is the net amount across settlements and all TMs/
clients, in F&O Segment.
Options on Futures Contracts

Put and call options are being traded on an increasing number of futures contracts. Trading
options on futures allows the speculator to participate in the futures market and know in
advance what the maximum loss on his position will be. The purchase of a call entitles the
option buyer the right, but not the obligation, to purchase a futures contract at a specified
price at any time during the life of the option. The underlying futures contract and the price
are specified. The purchase of a put option entitles the option buyer the right, not the
obligation, to sell a specified futures contract at a specified price. Keep in mind that the
profit realized with an option strategy is reduced by the option premium. The option's price
is determined in the same fashion that an equity option is determined.
THE BLACK-SCHOLES MODEL
The Black-Scholes model is the most important option pricing model, which almost
accurately values the option price. Option trading got a big boost after the model was
developed in 1973. Originally, it was for non-dividend paying stocks, but was
subsequently modified to be useful for value other asset options as well. This model uses
the following equations for pricing European call options.
C = SN(d1) – X exp-rt N(d2)

d1= ln(S/X exp-rt)/δ √ t + 0.5 δ √ t
d2= d1- δ √ t
here,
c= option price
S = spot price
X= strike price
r= risk-free interest rate
t= time to expiration
δ = annualised volatility of stock returns (standard deviation of stock returns)
ln is the natural logarithm
N ( ) is the cumulative probability distribution function for a standardized normal variable
VOLATILITY

Volatility of a stock price is a measure of how uncertain we are about future stock price
movements. As volatility increases, the chance that the stock will do very well or very
poorly increases. For the owner of the stock, these two outcomes tend to offset each other
1) Historical Volatility:
Historical volatility is a statistical measurement of past price movements. It is found by

finding the standard deviation of the price relative on any underlying.
In mathematical form it is given by the following equation.
( )
2
1 n
S= ∑ µ −µ
n −1 i =1
Where
n+1 : number of observations
Si : stock price at end of ith interval (i =1,2,3,….,n)
ui : ln(Si / Si-1)
There is an important issue concerned with whether time should be measured in calendar
days or trading days when volatility parameters are being estimated and used.
Usage of historical and implied volatility
The concept of Normal Distribution states that you can derive a deep understanding of
possible movements in the share price from the figure of historical volatility. The
movement will be within 1 standard deviation 66% of the time, within 2 standard
deviations 95% of the time and within 3 standard deviations 99% of the time.
Example:
Suppose the historical volatility today for Satyam scrip is 4.43%. If Satyam’s closing price
today is Rs 287, expected movement in the next one day can be tabulated as under:
Number of Percentage Price Lower Higher Probability

Standard Movement Price Price
Deviations
One 4.43% 13 274 300 66%
Two 8.86% 26 261 313 95%
Three 13.29% 38 325 249 99%
Similarly possible movement over the next nine days can be forecasted as under:
Number of Percentage Price Lower Higher Probability
Standard Movement Price Price
Deviations
One 13.29% 38 325 249 66%
Two 26.58% 76 211 363 95%
Three 39.87% 114 173 401 99%
Predicting is a rather difficult science. First of all, we are not looking at direction at all. We
are not saying whether Satyam will move up or down. Secondly, we are forecasting

possible maximum swing in magnitude irrespective of direction. For example, we are
saying that Satyam will close between Rs 249 to Rs 325 tomorrow and the probability of
this happening is 99%. The implication is that the probability of Satyam closing below Rs
249 or above Rs 325 is 1%.
CHAPTER
8
INDICATORS OF
INVESTING IN FUTURES & OPTION

CH 8 INDICATORS OF INVESTING IN FUTURES & OPTION:
1. OPEN INTEREST
2. PUT/CALL RATIO
3. VOLUME
4. COST OF CARRY
5. MARKET WIDE POSITION LIMIT
6. ROLL OVER POSITION
7. PUT CALL PARITY

CHAPTER
9
OPEN INTEREST

CH 9 OPEN INTEREST
Open Interest is the number of open contracts of a given future or option contract. An open
contract can be a long or short contract that has not been exercised, closed out, or allowed
to expire. Open interest is really more of a data field than an indicator.
Interpretation
Incidentally, in individual stocks, open interest can be a better indicator of demand than
trading volumes in the underlying. Volumes are often used as an indication of bullishness.
However, daily volumes reflect short-term daily trades that are closed out by settling rather
than delivery. These day trades distort the picture of long-term demand.
By itself, open interest only shows the liquidity of a specific contract or market. However,
combining volume analysis with open interest sometimes provides subtle clues to the flow
of money in and out of the market:
• Rising volume and rising open interest confirm the direction of the current trend.
• Falling volume and falling open interest signal that an end to the current trend may be
imminent.
But options are differentiated according to price as well as position. Analysts can easily
break down open interest into puts and calls. Then, the open interest put-call ratio can be
analysed in a fashion similar to the traded put-call ratio.
How to interpret the open interest?

Scrip: HDIL.
DATE SPOT VOLUME OPEN PUT-CALL

PRICE INTEREST RATIO
June 3 641.00 683600 398800 0.75
June 4 635.00 531600 414400 0.55
June 5 647.80 747200 482800 0.54
June 6 635.00 663600 444000 1.03
June 7 624.00 668400 486800 0.75
June 10 650.90 603200 467600 0.79
June 11 661.00 831200 480800 0.66
June 12 652.60 490400 486800 0.50
June 13 651.00 1243200 498800 0.38
June 14 644.00 525200 501600 0.44
June 17 643.00 332000 503600 0.45
June 18 644.30 468000 470800 0.26
The above table shows spot price, futures volume, futures open interest and put/call ratios
on daily bases. As we have mentioned earlier that one must keep in mind that one must

decide that increase in open interest is due to bullishness or bearishness in case of futures
contracts
CHAPTER
10
PUT/CALL RATIO

PUT/CALL RATIO
The Put/Call Ratio ("P/C Ratio") is a market sentiment indicator that shows the
relationship between the numbers of Puts to Calls traded.
Interpretation
A Call gives an investor the right to purchase lot size of stock at a pre-determined price.
Investors who purchase Calls expect stock prices to rise in the coming months. Conversely,
a Put gives an investor the right to sell lot size of stock at a pre-set price. Investors
purchasing Puts expect stock prices to decline.
The P/C Ratio is a contrarian indicator. When it reaches "excessive" levels, the market
usually corrects by moving the opposite direction. The following table, general guidelines
for interpreting the P/C Ratio. However, the market does not have to correct itself just
because investors are excessive in their bullish/bearish beliefs!
Indication
P/C ratio
Less than 0.35 Extremely bullish
Greater than 0.75 Excessively bearish
Greater than 0.35 and Uncertain
less than 0.75
Calculation
The Puts/Calls Ratio is calculated by dividing the volume of Puts by the volume of Calls.
P/C Ratio=Volume Traded For Put Options/Volume Traded For Call Options
DYNAMICS IN PUT CALL RATIO:

But as per recent observation it is quiet evident that the above mentioned ratios doesn’t
work as per its interpretation. So we have found out the recent observation as per Open
Interest as well as Volume basis as below.
Indication
P/C ratio
Less than 0.65 Extremely bullish
Greater than 1.35 Extremely bearish
Greater than 0.65 and Uncertain
less than 1.35

CHAPTER
11
ANALYSIS

[a] STUDY OF SHORT TERM TREND OF NIFTY DERIVATIVES USING:
 Put/Call Ratio
 Open Interest
 Put/ Call Ratio:
There are two ways in which we can determine Put/Call Ratio:
o On the basis of Volume

o On the basis of Open Interest
PUT/CALL RATIO ON THE BASIS OF VOLUME OF NIFTY FUTURES FOR

THE MONTH OF FEB-2010.
CLOSING
TRADING PRE. DAY PUT PRE. DAY CLOSING
DATE VIEW RE
DAY PUT/CALL CALL NIFTY DAY
RATIO RATIO CLOSING NIFTY
29/1/2010 1 1.08 1.01 4867 4882 BULLISH SUC
1/2/2010 2 1.01 1.11 4882 4899 BEARISH FAI
2/2/2010 3 1.11 1.18 4899 4830 BEARISH SUC
3/2/2010 4 1.18 1.07 4830 4925.8 BULLISH SUC
4/2/2010 5 1.07 0.99 4925.8 4845.35 BULLISH FAI
5/2/2010 6 0.99 1.05 4845.35 4718.65 BEARISH SUC
6/2/2010 7 1.05 1.11 4718.65 4757.25 BEARISH FAI
8/2/2010 8 1.11 1.05 4757.25 4760.4 BULLISH SUC
9/2/2010 9 1.05 1.03 4760.4 4792.65 BULLISH SUC
10/2/2010 10 1.03 0.84 4792.65 4757.2 BULLISH FAI
11/2/2010 11 0.84 0.93 4757.2 4826.85 BEARISH FAI
15/2/2010 12 0.93 1.01 4826.85 4801.95 BEARISH SUC
16/2/2010 13 1.01 0.94 4801.95 4855.75 BULLISH SUC
17/2/2010 14 0.94 0.84 4855.75 4914 BULLISH SUC
18/2/2010 15 0.84 1.12 4914 4886.8 BEARISH SUC
19/2/2010 16 1.12 1.06 4886.8 4845.95 BULLISH FAI
22/2/2010 17 1.06 0.91 4845.95 4856.6 BULLISH SUC
SUCCESS / FAILURE RATIO:
From the above mentioned 17 trading days, in 11 trading days it follows the Put/Call
Ratios (Volume) Criterion, so the success ratio is 65%, while in 6 trading it has
turned around the other way.

PUT/CALL
RATIO ON
THE BASIS
OF OPEN
INTEREST
OF NIFTY
FUTURES
FOR THE
MONTH OF
FEB-2010.
TRADING PRE. DAY CLOSING PRE. DAY CLOSING
DATE DAY PUT/CALL PUT CALL NIFTY DAY VIEW RESULT
RATIO RATIO CLOSING NIFTY
29/1/2010 1 1.1 1.04 4867 4882 BULLISH SUCCESS
1/2/2010 2 1.04 1.09 4882 4899 BEARISH FAILURE
2/2/2010 3 1.09 1.2 4899 4830 BEARISH SUCCESS
3/2/2010 4 1.2 1.08 4830 4925.8 BULLISH SUCCESS
4/2/2010 5 1.08 1.17 4925.8 4845.35 BEARISH SUCCESS
5/2/2010 6 1.17 1.08 4845.35 4718.65 BULLISH FAILURE
6/2/2010 7 1.08 0.98 4718.65 4757.25 BULLISH SUCCESS
8/2/2010 8 0.98 0.97 4757.25 4760.4 BULLISH SUCCESS
9/2/2010 9 0.97 0.94 4760.4 4792.65 BEARISH SUCCESS
10/2/2010 10 0.94 1 4792.65 4757.2 BULLISH SUCCESS
11/2/2010 11 1 0.91 4757.2 4826.85 BEARISH SUCCESS
15/2/2010 12 0.91 1.02 4826.85 4801.95 BEARISH SUCCESS
16/2/2010 13 1.02 0.96 4801.95 4855.75 BULLISH SUCCESS
17/2/2010 14 0.96 1.08 4855.75 4914 BEARISH FAILURE
18/2/2010 15 1.08 1.12 4914 4886.8 BEARISH SUCCESS
19/2/2010 16 1.12 1.06 4886.8 4845.95 BULLISH FAILURE
22/2/2010 17 1.06 0.97 4845.95 4856.6 BULLISH SUCCESS
SUCCESS / FAILURE RATIO:
From the above mentioned 17 trading days, in 13 trading days it follows the Put/Call
Ratios (Open Interest) Criterion, so the success ratio is 76.47% while in 4 trading
days it has turned around the other way.

PUT/CALL
RATIO ON
THE BASIS
OF
COMBINATION OF OPEN INTEREST & VOLUME OF NIFTY FUTURES FOR

THE MONTH OF FEB-2010.
VOL. COMMON
DAY OI VIEW VIEW VIEW RESULT
1 BULLISH BULLISH YES SUCCESS
2 BEARISH BEARISH YES FAILURE
3 BEARISH BEARISH YES SUCCESS
5 BEARISH BULLISH NO NA
6 BULLISH BEARISH NO NA
16 BULLISH BULLISH YES FAILURE
SUCCESS /FAILURE RATIOS:

From the above mentioned 16 trading days, in 10 trading days, it has given the same
view regarding the market, from this, in 8 trading days it is successful. Thus the
NEXT
DAY
TRADI PREV CLOSIN CLOSI NIFTY
D NG DAY G DAY PREV.CLOS NG CLOSI
ATE DAY O.I O.I ING NIFTY NIFTY NGVIEW RESULT
29/1/20 229327 BULLI
10 1 50 27986150 4843.7 4872.05 4882 SH SUCC
1/2/20 279861 BULLI
10 2 50 29923300 4872.05 4882 4899 SH SUCC
2/2/201 299233 BEARI
0 3 00 29896500 4882 4899 4830 SH SUCC
3/2/201 298965 BEARI
0 4 00 32216250 4899 4830 4925.8 SH FAIL
4/2/201 322162 BEARI
0 5 50 29924950 4830 4925.8 4845.35 SH FAIL
5/2/20 299249 BEARI
10 6 50 30668050 4925.8 4845.35 4718.65 SH SUCC
6/2/201 306680 BEARI
0 7 50 31376300 4845.35 4718.65 4757.25 SH NETR
8/2/201 313763 BEARI
0 8 00 31349800 4718.65 4757.25 4760.4 SH NETR
9/2/20 313498 BEARI
10 9 00 31265550 4757.25 4760.4 4792.65 SH NETR
10/2/20 312655 BEARI
10 10 50 29230200 4760.4 4792.65 4757.2 SH SUC
11/2/20 292302 BEARI
10 11 00 29873700 4792.65 4757.2 4826.85 SH FAIL
15/2/20 298737 BEARI
10 12 00 28537150 4757.2 4826.85 4801.95 SH SUC
16/2/20 285371 BEARI
10 13 50 28928050 4826.85 4801.95 4855.75 SH FAIL
17/2/20 289280 BEARI
10 14 50 28665850 4801.95 4855.75 4914 SH FAIL
18/2/20 286658 BULLI
10 15 50 30541650 4855.75 4914 4886.8 SH FAIL
19/2/20 305416 BULLI
10 16 50 26499600 4914 4886.8 4845.95 SH FAIL
22/2/20 264996 BULLI
10 17 00 24762400 4886.8 4845.95 4856.6 SH FAIL
23/2/20 247624 BEARI
10 18 00 22727400 4845.95 4856.6 4870.55 SH FAIL
24/2/20 227274 BEARI
10 19 00 20702050 4856.6 4870.55 4862 SH SUCC
25/2/20 207020 BULLI
10 20 50 14860050 4870.55
INTERNATIONAL 4862 OF BUSINESS
INSTITUTE 4863.2 SH
STUDY SUCC
success ratio is 80%.while in 6 trading days, it contradicts. Thus the combination of
Volume & Open Interest gives high accuracy than the individual.
OPEN
INTEREST:
The following
are some
interpretation
that can be
made using
open interest.
• Rising
open
interest in
an uptrend is bullish
• Declining open interest in an uptrend is bearish.
• Rising open interest in a downtrend is bearish.
• Declining open interest in a downtrend is bullish.
There are a few interesting contrarian theories that revolve around the "Open Interest" in
derivative contracts. The number of open contracts at the end of the day will vary
according to demand for the underlying stock.
TABLE SHOWING THE RELATIONSHIP BETWEEN THE CHANGE IN OPEN

INTEREST AND PRICE OF THE NIFTY FUTURES FOR THE MONTH OF FEB
2010 AND ITS EFFECT ON THE NEXT DAY PRICES.

SUCCESS /FAILURE RATIOS:
From the above mentioned 20 trading days, in 10 trading days it follows the Open
Interest Criterion, so the pure success ratio is 50.00% while in 7 trading days it has
turned around the other way.
And in 3 trading days, it has given the neutral result.
CH 11(B) THE RISK MINIMISATION TRADING STRATEGIES USING

FUTURES AND OPTIONS ON THE BASIS OF:
 Bullish Outlook
 Bearish Outlook
 Volatile Outlook
 Range bound Outlook

 Opportunistic Outlook
BY USING:
o OPTIONS
o COMBINATIONS OF FUTURES & OPTIONS
 TRADING STRATEGIES USED FOR BULLISH OUTLOOK

(1) Long Call Ladder
(2) Bull Spread
(3) Covered Call Writing
(4) Protective Put Buying
(5) Collar Strategy
(6) Short Combo
(7) Long Strap
 TRADING STRATEGIES USED FOR BEARISH OUTLOOK

(1) Long Put Ladder
(2) Bear Spread
(3) Covered Put Writing
(4) Protective Call Buying
(5) Reverse Collar Strategy
(6) Long Combo
(7) Long Strip
 TRADING STRATEGIES USED FOR RANGEBOUND OUTLOOK

(1) Long Condor

(2) Double Top
(3) Christmas Tree
(4) Short Guts
(5) Ratio Spread
(6) Butterfly
 TRADING STRATEGIES USED FOR VOLATILE OUTLOOK

(1) Long Guts
(2) Short Condor
(3) Butterfly Spread
(4) Long straddle
(5) Long strangle
 TRADING STRATEGIES USED FOR OPPORTUNISTIC OUTLOOK

(1) Conversion
(2) Reversal
(3) Long Box
TRADING STRATEGIES USED FOR BULLISH OUTLOOK

(1) Long Condor Ladder
DESCRIPTION: - Buy a Call at a low Strike price K1, sell a call at a high Strike price K2
& sell a call at a higher Strike price K3
PAYOFF:
• At St < K1, fixed profit of Net Premium Received
• At K2 > St > K1, Profit increases linearly with the St
• At K3 > St > K2 , Fixed Profit ; i.e Net Premium Received +
Diference between K2 & K3
• At St > K3, Profit falls linearly with St
When to Use: - When u have a Bullish Outlook but not very Bullish

Market expectation: Direction bearish/volatility bearish. In this case the holder expects
the market to settle between B and C but feels that volatility will not rise.
Profit & loss characteristics at expiry:

Profit: Limited to the difference between strikes A and B plus (minus) net credit (debit).
Loss: Unlimited if underlying rallies. At A or below, loss limited to net cost.
Break-even: Lower break-even reached when the underlying exceeds the lower strike
option A, by the same amount as the net cost of the position. Higher break-even point
reached when the intrinsic value of option A, plus (minus) the net credit (debit) from
establishing the position, is equal to the intrinsic value of the two higher strike options at B
and C.
Current Price of the Stock =So= 648

Strike Price of Call Option=K1= 640
Premium of Call Option =K1= Rs. 20.2
Premium of Call Optionk3 6.95
PAY-OFF TABLE:
Premiu Gain / Premiu Gain / Premiu Gain / Total
m for Loss on m for Loss on m for Loss on Gain/Los
St K1 K1 K2 K2 K3 K3 s
635 20.2 -20.2 14.45 14.45 6.95 6.95 1.2

636 20.2 -20.2 14.45 14.45 6.95 6.95 1.2
637 20.2 -20.2 14.45 14.45 6.95 6.95 1.2
638 20.2 -20.2 14.45 14.45 6.95 6.95 1.2
639 20.2 -20.2 14.45 14.45 6.95 6.95 1.2
640 20.2 -20.2 14.45 14.45 6.95 6.95 1.2
641 20.2 -19.2 14.45 14.45 6.95 6.95 2.2
642 20.2 -18.2 14.45 14.45 6.95 6.95 3.2
643 20.2 -17.2 14.45 14.45 6.95 6.95 4.2
644 20.2 -16.2 14.45 14.45 6.95 6.95 5.2
645 20.2 -15.2 14.45 14.45 6.95 6.95 6.2
646 20.2 -14.2 14.45 14.45 6.95 6.95 7.2
647 20.2 -13.2 14.45 14.45 6.95 6.95 8.2
648 20.2 -12.2 14.45 14.45 6.95 6.95 9.2
649 20.2 -11.2 14.45 14.45 6.95 6.95 10.2
650 20.2 -10.2 14.45 14.45 6.95 6.95 11.2

651 20.2 -9.2 14.45 14.45 6.95 6.95 12.2
652 20.2 -8.2 14.45 14.45 6.95 6.95 13.2
653 20.2 -7.2 14.45 14.45 6.95 6.95 14.2
654 20.2 -6.2 14.45 14.45 6.95 6.95 15.2
655 20.2 -5.2 14.45 14.45 6.95 6.95 16.2
656 20.2 -4.2 14.45 14.45 6.95 6.95 17.2
657 20.2 -3.2 14.45 14.45 6.95 6.95 18.2
658 20.2 -2.2 14.45 14.45 6.95 6.95 19.2
659 20.2 -1.2 14.45 14.45 6.95 6.95 20.2
660 20.2 -0.2 14.45 14.45 6.95 6.95 21.2
661 20.2 0.8 14.45 13.45 6.95 6.95 21.2
662 20.2 1.8 14.45 12.45 6.95 6.95 21.2
663 20.2 2.8 14.45 11.45 6.95 6.95 21.2
664 20.2 3.8 14.45 10.45 6.95 6.95 21.2
665 20.2 4.8 14.45 9.45 6.95 6.95 21.2
666 20.2 5.8 14.45 8.45 6.95 6.95 21.2
667 20.2 6.8 14.45 7.45 6.95 6.95 21.2
668 20.2 7.8 14.45 6.45 6.95 6.95 21.2
669 20.2 8.8 14.45 5.45 6.95 6.95 21.2
670 20.2 9.8 14.45 4.45 6.95 6.95 21.2
671 20.2 10.8 14.45 3.45 6.95 6.95 21.2
672 20.2 11.8 14.45 2.45 6.95 6.95 21.2
673 20.2 12.8 14.45 1.45 6.95 6.95 21.2
674 20.2 13.8 14.45 0.45 6.95 6.95 21.2
675 20.2 14.8 14.45 -0.55 6.95 6.95 21.2
676 20.2 15.8 14.45 -1.55 6.95 6.95 21.2
677 20.2 16.8 14.45 -2.55 6.95 6.95 21.2
678 20.2 17.8 14.45 -3.55 6.95 6.95 21.2
679 20.2 18.8 14.45 -4.55 6.95 6.95 21.2
680 20.2 19.8 14.45 -5.55 6.95 6.95 21.2
681 20.2 20.8 14.45 -6.55 6.95 5.95 20.2
682 20.2 21.8 14.45 -7.55 6.95 4.95 19.2

(2) Bull Spread
DESCRIPTION: - Long on 1 Call at low Strike price K1 & Short on 1 Call at higher
strike price K2
PAYOFF: At St ≤ K1, Loss is Fixed; i.e Net Premium Paid

At K2 ≥ St ≥K1, Loss Reduces linearly with increase in Price
At St > K2, Profit is Fixed; i.e K2 - K1 - Net Premium paid
Market Expectation: Market bullish/volatility neutral. The spread has the advantage of
being cheaper to establish than the purchase of a single call, as the premium received from
the sold call reduces the overall cost. The spread offers a limited profit potential if the
underlying rises and a limited loss if the underlying falls.
When to Use: - Mildly Bullish Perspective
Profit and loss characteristics at expiry:

Profit: Limited to the difference between the two strikes minus net premium cost.
Maximum profit occurs where the underlying rises to the level of the higher strike B or
above.
Loss: Limited to any initial premium paid in establishing the position. Maximum loss
occurs where the underlying falls to the level of the lower strike A or below.
Break-even: Reached when the underlying is above strike A by the same amount as the
net cost of establishing the position.


PAY-OFF TABLE
Premiu Gain / Premiu Gain /

m for Loss on m for Loss on Total
St Kc1 Kc1 Kc2 Kc2 Gain/Loss
613 37.65 -37.65 28.9 28.9 -8.75

614 37.65 -37.65 28.9 28.9 -8.75
615 37.65 -37.65 28.9 28.9 -8.75
616 37.65 -37.65 28.9 28.9 -8.75
617 37.65 -37.65 28.9 28.9 -8.75
618 37.65 -37.65 28.9 28.9 -8.75
619 37.65 -37.65 28.9 28.9 -8.75
620 37.65 -37.65 28.9 28.9 -8.75
621 37.65 -36.65 28.9 28.9 -7.75
622 37.65 -35.65 28.9 28.9 -6.75
623 37.65 -34.65 28.9 28.9 -5.75
624 37.65 -33.65 28.9 28.9 -4.75
625 37.65 -32.65 28.9 28.9 -3.75
626 37.65 -31.65 28.9 28.9 -2.75
627 37.65 -30.65 28.9 28.9 -1.75
628 37.65 -29.65 28.9 28.9 -0.75
629 37.65 -28.65 28.9 28.9 0.25
630 37.65 -27.65 28.9 28.9 1.25
631 37.65 -26.65 28.9 28.9 2.25
632 37.65 -25.65 28.9 28.9 3.25
633 37.65 -24.65 28.9 28.9 4.25
634 37.65 -23.65 28.9 28.9 5.25
635 37.65 -22.65 28.9 28.9 6.25
636 37.65 -21.65 28.9 28.9 7.25
637 37.65 -20.65 28.9 28.9 8.25
638 37.65 -19.65 28.9 28.9 9.25
639 37.65 -18.65 28.9 28.9 10.25
640 37.65 -17.65 28.9 28.9 11.25
641 37.65 -16.65 28.9 28.9 12.25
642 37.65 -15.65 28.9 28.9 13.25
643 37.65 -14.65 28.9 28.9 14.25
644 37.65 -13.65 28.9 28.9 15.25
645 37.65 -12.65 28.9 28.9 16.25
646 37.65 -11.65 28.9 28.9 17.25
647 37.65 -10.65 28.9 28.9 18.25
648 37.65 -9.65 28.9 28.9 19.25
649 37.65 -8.65 28.9 28.9 20.25

650 37.65 -7.65 28.9 28.9 21.25
651 37.65 -6.65 28.9 28.9 22.25
652 37.65 -5.65 28.9 28.9 23.25
653 37.65 -4.65 28.9 28.9 24.25
654 37.65 -3.65 28.9 28.9 25.25
655 37.65 -2.65 28.9 28.9 26.25
656 37.65 -1.65 28.9 28.9 27.25
657 37.65 -0.65 28.9 28.9 28.25
658 37.65 0.35 28.9 28.9 29.25
659 37.65 1.35 28.9 28.9 30.25
660 37.65 2.35 28.9 28.9 31.25
661 37.65 3.35 28.9 26.9 30.25
662 37.65 4.35 28.9 24.9 29.25
663 37.65 5.35 28.9 22.9 28.25
664 37.65 6.35 28.9 20.9 27.25
665 37.65 7.35 28.9 18.9 26.25
666 37.65 8.35 28.9 16.9 25.25
667 37.65 9.35 28.9 14.9 24.25
668 37.65 10.35 28.9 12.9 23.25
669 37.65 11.35 28.9 10.9 22.25
670 37.65 12.35 28.9 8.9 21.25
671 37.65 13.35 28.9 6.9 20.25
672 37.65 14.35 28.9 4.9 19.25
673 37.65 15.35 28.9 2.9 18.25
674 37.65 16.35 28.9 0.9 17.25
675 37.65 17.35 28.9 -1.1 16.25
676 37.65 18.35 28.9 -3.1 15.25
677 37.65 19.35 28.9 -5.1 14.25
678 37.65 20.35 28.9 -7.1 13.25
679 37.65 21.35 28.9 -9.1 12.25
680 37.65 22.35 28.9 -11.1 11.25
681 37.65 23.35 28.9 -13.1 10.25
682 37.65 24.35 28.9 -15.1 9.25
683 37.65 25.35 28.9 -17.1 8.25
684 37.65 26.35 28.9 -19.1 7.25
685 37.65 27.35 28.9 -21.1 6.25
686 37.65 28.35 28.9 -23.1 5.25
687 37.65 29.35 28.9 -25.1 4.25
688 37.65 30.35 28.9 -27.1 3.25
689 37.65 31.35 28.9 -29.1 2.25
690 37.65 32.35 28.9 -31.1 1.25
691 37.65 33.35 28.9 -33.1 0.25
692 37.65 34.35 28.9 -35.1 -0.75
693 37.65 35.35 28.9 -37.1 -1.75
694 37.65 36.35 28.9 -39.1 -2.75

695 37.65 37.35 28.9 -41.1 -3.75

TRADING STRATEGIES USED FOR VOLATILE OUTLOOK
(1) Long Guts
DESCRIPTION: - Long on Call at a low Strike Price & Long on Put at a high Strike Price
PAYOFF:
• At St < K1, Profit Reduces Linearly with Increase in Price
• At K2 > St > K1, Loss is Fixed; i.e Difference between (K1 & K2) and
Total Premium Paid
• At St > K3, Profit increases Linearly with Increase in Price
When to Use: - When the stock is too volatile
Market expectation: Market neutral/volatility bullish. The market is at, or about the A-B
range and a large directional move in the underlying is anticipated. Position has
characteristics comparable to an in-the-money strangle.
Profit & loss characteristics at expiry:
Profit: Unlimited in a rising or falling market. A substantial directional movement is

required however.
Loss: Limited to the initial premium paid less the difference between A and B; occurs if
the underlying remains within the range A-B.
Break-even: Reached if the underlying rises above the higher strike price B by the amount
equal to the cost of establishing the position less A-B, or if the underlying falls below the
lower strike price A by the amount equal to the cost of establishing the position less A-B.

Strike Price of Put Option =Kp= 680
Premium of Put Option =P= Rs. 36.5
Strike Price of Call Option=Kc= 620
Premium of Call Option =C= Rs. 37.65

PAY-OFF TABLE
Price of Profit / Profit /
Stock on Premiu Loss on Premiu Loss on Total
Expiry Day m Paid Call m Put Put Profit /
( St ) (C) Position (P) Position Loss
595 37.65 -37.65 36.5 48.5 10.85

596 37.65 -37.65 36.5 47.5 9.85
597 37.65 -37.65 36.5 46.5 8.85
598 37.65 -37.65 36.5 45.5 7.85
599 37.65 -37.65 36.5 44.5 6.85
600 37.65 -37.65 36.5 43.5 5.85
601 37.65 -37.65 36.5 42.5 4.85
602 37.65 -37.65 36.5 41.5 3.85
603 37.65 -37.65 36.5 40.5 2.85
604 37.65 -37.65 36.5 39.5 1.85
605 37.65 -37.65 36.5 38.5 0.85
606 37.65 -37.65 36.5 37.5 -0.15
607 37.65 -37.65 36.5 36.5 -1.15
608 37.65 -37.65 36.5 35.5 -2.15
609 37.65 -37.65 36.5 34.5 -3.15
610 37.65 -37.65 36.5 33.5 -4.15
611 37.65 -37.65 36.5 32.5 -5.15
612 37.65 -37.65 36.5 31.5 -6.15
613 37.65 -37.65 36.5 30.5 -7.15
614 37.65 -37.65 36.5 29.5 -8.15
615 37.65 -37.65 36.5 28.5 -9.15
616 37.65 -37.65 36.5 27.5 -10.15
617 37.65 -37.65 36.5 26.5 -11.15
618 37.65 -37.65 36.5 25.5 -12.15
619 37.65 -37.65 36.5 24.5 -13.15
620 37.65 -37.65 36.5 23.5 -14.15
621 37.65 -36.65 36.5 22.5 -14.15
622 37.65 -35.65 36.5 21.5 -14.15
623 37.65 -34.65 36.5 20.5 -14.15
624 37.65 -33.65 36.5 19.5 -14.15
625 37.65 -32.65 36.5 18.5 -14.15
626 37.65 -31.65 36.5 17.5 -14.15
627 37.65 -30.65 36.5 16.5 -14.15
628 37.65 -29.65 36.5 15.5 -14.15
629 37.65 -28.65 36.5 14.5 -14.15
630 37.65 -27.65 36.5 13.5 -14.15
631 37.65 -26.65 36.5 12.5 -14.15
632 37.65 -25.65 36.5 11.5 -14.15

633 37.65 -24.65 36.5 10.5 -14.15
634 37.65 -23.65 36.5 9.5 -14.15
635 37.65 -22.65 36.5 8.5 -14.15
636 37.65 -21.65 36.5 7.5 -14.15
637 37.65 -20.65 36.5 6.5 -14.15
638 37.65 -19.65 36.5 5.5 -14.15
639 37.65 -18.65 36.5 4.5 -14.15
640 37.65 -17.65 36.5 3.5 -14.15
641 37.65 -16.65 36.5 2.5 -14.15
642 37.65 -15.65 36.5 1.5 -14.15
643 37.65 -14.65 36.5 0.5 -14.15
644 37.65 -13.65 36.5 -0.5 -14.15
645 37.65 -12.65 36.5 -1.5 -14.15
646 37.65 -11.65 36.5 -2.5 -14.15
647 37.65 -10.65 36.5 -3.5 -14.15
648 37.65 -9.65 36.5 -4.5 -14.15
649 37.65 -8.65 36.5 -5.5 -14.15
650 37.65 -7.65 36.5 -6.5 -14.15
651 37.65 -6.65 36.5 -7.5 -14.15
652 37.65 -5.65 36.5 -8.5 -14.15
653 37.65 -4.65 36.5 -9.5 -14.15
654 37.65 -3.65 36.5 -10.5 -14.15
655 37.65 -2.65 36.5 -11.5 -14.15
656 37.65 -1.65 36.5 -12.5 -14.15
657 37.65 -0.65 36.5 -13.5 -14.15
658 37.65 0.35 36.5 -14.5 -14.15
659 37.65 1.35 36.5 -15.5 -14.15
660 37.65 2.35 36.5 -16.5 -14.15
661 37.65 3.35 36.5 -17.5 -14.15
662 37.65 4.35 36.5 -18.5 -14.15
663 37.65 5.35 36.5 -19.5 -14.15
664 37.65 6.35 36.5 -20.5 -14.15
665 37.65 7.35 36.5 -21.5 -14.15
666 37.65 8.35 36.5 -22.5 -14.15
667 37.65 9.35 36.5 -23.5 -14.15
668 37.65 10.35 36.5 -24.5 -14.15
669 37.65 11.35 36.5 -25.5 -14.15
670 37.65 12.35 36.5 -26.5 -14.15
671 37.65 13.35 36.5 -27.5 -14.15
672 37.65 14.35 36.5 -28.5 -14.15
673 37.65 15.35 36.5 -29.5 -14.15
674 37.65 16.35 36.5 -30.5 -14.15
675 37.65 17.35 36.5 -31.5 -14.15
676 37.65 18.35 36.5 -32.5 -14.15
677 37.65 19.35 36.5 -33.5 -14.15

678 37.65 20.35 36.5 -34.5 -14.15
679 37.65 21.35 36.5 -35.5 -14.15
680 37.65 22.35 36.5 -36.5 -14.15
681 37.65 23.35 36.5 -36.5 -13.15
682 37.65 24.35 36.5 -36.5 -12.15
683 37.65 25.35 36.5 -36.5 -11.15
684 37.65 26.35 36.5 -36.5 -10.15
685 37.65 27.35 36.5 -36.5 -9.15
686 37.65 28.35 36.5 -36.5 -8.15
687 37.65 29.35 36.5 -36.5 -7.15
688 37.65 30.35 36.5 -36.5 -6.15
689 37.65 31.35 36.5 -36.5 -5.15
690 37.65 32.35 36.5 -36.5 -4.15
691 37.65 33.35 36.5 -36.5 -3.15
692 37.65 34.35 36.5 -36.5 -2.15
693 37.65 35.35 36.5 -36.5 -1.15
694 37.65 36.35 36.5 -36.5 -0.15
695 37.65 37.35 36.5 -36.5 0.85
696 37.65 38.35 36.5 -36.5 1.85
697 37.65 39.35 36.5 -36.5 2.85
698 37.65 40.35 36.5 -36.5 3.85
699 37.65 41.35 36.5 -36.5 4.85
700 37.65 42.35 36.5 -36.5 5.85
701 37.65 43.35 36.5 -36.5 6.85
702 37.65 44.35 36.5 -36.5 7.85
703 37.65 45.35 36.5 -36.5 8.85
704 37.65 46.35 36.5 -36.5 9.85
705 37.65 47.35 36.5 -36.5 10.85

PAY-OFF TABLE
Premiu Gain / Premiu Gain / Premiu Gain / Premiu Gain /

m for Loss on m for Loss on m for Loss on m for Loss on Total
St Kc1 Kc1 Kp1 Kp1 Kc2 Kc2 Kp2 Kp2 Gain/Lo
600 34.65 -34.65 7.85 -12.15 6.95 6.95 36.5 43.5 3.65
601 34.65 -34.65 7.85 -11.15 6.95 6.95 36.5 42.5 3.65
602 34.65 -34.65 7.85 -10.15 6.95 6.95 36.5 41.5 3.65
603 34.65 -34.65 7.85 -9.15 6.95 6.95 36.5 40.5 3.65
604 34.65 -34.65 7.85 -8.15 6.95 6.95 36.5 39.5 3.65
605 34.65 -34.65 7.85 -7.15 6.95 6.95 36.5 38.5 3.65
606 34.65 -34.65 7.85 -6.15 6.95 6.95 36.5 37.5 3.65
607 34.65 -34.65 7.85 -5.15 6.95 6.95 36.5 36.5 3.65
608 34.65 -34.65 7.85 -4.15 6.95 6.95 36.5 35.5 3.65
609 34.65 -34.65 7.85 -3.15 6.95 6.95 36.5 34.5 3.65
610 34.65 -34.65 7.85 -2.15 6.95 6.95 36.5 33.5 3.65
611 34.65 -34.65 7.85 -1.15 6.95 6.95 36.5 32.5 3.65
612 34.65 -34.65 7.85 -0.15 6.95 6.95 36.5 31.5 3.65
613 34.65 -34.65 7.85 0.85 6.95 6.95 36.5 30.5 3.65
614 34.65 -34.65 7.85 1.85 6.95 6.95 36.5 29.5 3.65
615 34.65 -34.65 7.85 2.85 6.95 6.95 36.5 28.5 3.65
616 34.65 -34.65 7.85 3.85 6.95 6.95 36.5 27.5 3.65
617 34.65 -34.65 7.85 4.85 6.95 6.95 36.5 26.5 3.65
618 34.65 -34.65 7.85 5.85 6.95 6.95 36.5 25.5 3.65
619 34.65 -34.65 7.85 6.85 6.95 6.95 36.5 24.5 3.65
620 34.65 -34.65 7.85 7.85 6.95 6.95 36.5 23.5 3.65
621 34.65 -33.65 7.85 7.85 6.95 6.95 36.5 22.5 3.65
622 34.65 -32.65 7.85 7.85 6.95 6.95 36.5 21.5 3.65
623 34.65 -31.65 7.85 7.85 6.95 6.95 36.5 20.5 3.65
624 34.65 -30.65 7.85 7.85 6.95 6.95 36.5 19.5 3.65
625 34.65 -29.65 7.85 7.85 6.95 6.95 36.5 18.5 3.65
626 34.65 -28.65 7.85 7.85 6.95 6.95 36.5 17.5 3.65
627 34.65 -27.65 7.85 7.85 6.95 6.95 36.5 16.5 3.65
628 34.65 -26.65 7.85 7.85 6.95 6.95 36.5 15.5 3.65
629 34.65 -25.65 7.85 7.85 6.95 6.95 36.5 14.5 3.65
630 34.65 -24.65 7.85 7.85 6.95 6.95 36.5 13.5 3.65
631 34.65 -23.65 7.85 7.85 6.95 6.95 36.5 12.5 3.65
632 34.65 -22.65 7.85 7.85 6.95 6.95 36.5 11.5 3.65
633 34.65 -21.65 7.85 7.85 6.95 6.95 36.5 10.5 3.65
634 34.65 -20.65 7.85 7.85 6.95 6.95 36.5 9.5 3.65
635 34.65 -19.65 7.85 7.85 6.95 6.95 36.5 8.5 3.65
636 34.65 -18.65 7.85 7.85 6.95 6.95 36.5 7.5 3.65
637 34.65 -17.65 7.85 7.85 6.95 6.95 36.5 6.5 3.65
638 34.65 -16.65 7.85 7.85 6.95 6.95 36.5 5.5 3.65

639 34.65 -15.65 7.85 7.85 6.95 6.95 36.5 4.5 3.65
640 34.65 -14.65 7.85 7.85 6.95 6.95 36.5 3.5 3.65
641 34.65 -13.65 7.85 7.85 6.95 6.95 36.5 2.5 3.65
642 34.65 -12.65 7.85 7.85 6.95 6.95 36.5 1.5 3.65
643 34.65 -11.65 7.85 7.85 6.95 6.95 36.5 0.5 3.65
644 34.65 -10.65 7.85 7.85 6.95 6.95 36.5 -0.5 3.65
645 34.65 -9.65 7.85 7.85 6.95 6.95 36.5 -1.5 3.65
646 34.65 -8.65 7.85 7.85 6.95 6.95 36.5 -2.5 3.65
647 34.65 -7.65 7.85 7.85 6.95 6.95 36.5 -3.5 3.65
648 34.65 -6.65 7.85 7.85 6.95 6.95 36.5 -4.5 3.65
649 34.65 -5.65 7.85 7.85 6.95 6.95 36.5 -5.5 3.65
650 34.65 -4.65 7.85 7.85 6.95 6.95 36.5 -6.5 3.65
651 34.65 -3.65 7.85 7.85 6.95 6.95 36.5 -7.5 3.65
652 34.65 -2.65 7.85 7.85 6.95 6.95 36.5 -8.5 3.65
653 34.65 -1.65 7.85 7.85 6.95 6.95 36.5 -9.5 3.65
654 34.65 -0.65 7.85 7.85 6.95 6.95 36.5 -10.5 3.65
655 34.65 0.35 7.85 7.85 6.95 6.95 36.5 -11.5 3.65
656 34.65 1.35 7.85 7.85 6.95 6.95 36.5 -12.5 3.65
657 34.65 2.35 7.85 7.85 6.95 6.95 36.5 -13.5 3.65
658 34.65 3.35 7.85 7.85 6.95 6.95 36.5 -14.5 3.65
659 34.65 4.35 7.85 7.85 6.95 6.95 36.5 -15.5 3.65
660 34.65 5.35 7.85 7.85 6.95 6.95 36.5 -16.5 3.65
661 34.65 6.35 7.85 7.85 6.95 6.95 36.5 -17.5 3.65
662 34.65 7.35 7.85 7.85 6.95 6.95 36.5 -18.5 3.65
663 34.65 8.35 7.85 7.85 6.95 6.95 36.5 -19.5 3.65
664 34.65 9.35 7.85 7.85 6.95 6.95 36.5 -20.5 3.65
665 34.65 10.35 7.85 7.85 6.95 6.95 36.5 -21.5 3.65
666 34.65 11.35 7.85 7.85 6.95 6.95 36.5 -22.5 3.65
667 34.65 12.35 7.85 7.85 6.95 6.95 36.5 -23.5 3.65
668 34.65 13.35 7.85 7.85 6.95 6.95 36.5 -24.5 3.65
669 34.65 14.35 7.85 7.85 6.95 6.95 36.5 -25.5 3.65
670 34.65 15.35 7.85 7.85 6.95 6.95 36.5 -26.5 3.65
671 34.65 16.35 7.85 7.85 6.95 6.95 36.5 -27.5 3.65
672 34.65 17.35 7.85 7.85 6.95 6.95 36.5 -28.5 3.65
673 34.65 18.35 7.85 7.85 6.95 6.95 36.5 -29.5 3.65
674 34.65 19.35 7.85 7.85 6.95 6.95 36.5 -30.5 3.65
675 34.65 20.35 7.85 7.85 6.95 6.95 36.5 -31.5 3.65
676 34.65 21.35 7.85 7.85 6.95 6.95 36.5 -32.5 3.65
677 34.65 22.35 7.85 7.85 6.95 6.95 36.5 -33.5 3.65
678 34.65 23.35 7.85 7.85 6.95 6.95 36.5 -34.5 3.65
679 34.65 24.35 7.85 7.85 6.95 6.95 36.5 -35.5 3.65
680 34.65 25.35 7.85 7.85 6.95 6.95 36.5 -36.5 3.65
681 34.65 26.35 7.85 7.85 6.95 5.95 36.5 -36.5 3.65
682 34.65 27.35 7.85 7.85 6.95 4.95 36.5 -36.5 3.65
683 34.65 28.35 7.85 7.85 6.95 3.95 36.5 -36.5 3.65

684 34.65 29.35 7.85 7.85 6.95 2.95 36.5 -36.5 3.65
685 34.65 30.35 7.85 7.85 6.95 1.95 36.5 -36.5 3.65

FINDINGS:
(1) Open Interest & Put/Call Ratio are the most important indicators which help to
determine the trend of Nifty for the next trading day.
(2) Put/Call Ratio can be calculated on the basis of:
(a) Open Interest
(b) Volume
For calculating Put/Call Ratio, Open Interest turned to more accurate base than
Volume for determining the trend of nifty for the next trading day as it sort out
all the outstanding positions from the total Volume.
(3) In determining the trend of the nifty for the next trading day, Analysis of Put/Call
Ratio proves to be more accurate compared to the Open Interest Analysis.
(4) For even better Outcome, one can use the combination of Open Interest & Volume
for calculating the Put/Call Ratio to determine the trend of nifty in the next
trading day.
(5) Basically there are types four types of Outlooks prevailing in the derivatives market
(a) Bullish View
(b) Bearish View
(c) Range bound View
(d) Volatile View
(6) The following table reflects the best suited strategies against each view:
VIEW STRATEGY
BULLISH (a) Collar Strategy
(b) Short Combo
(c) Long Strap
BEARISH (a) Reverse Collar
(b) Long Combo
(c) Long Strip
Volatile (a) Long Guts
(b) Long Straddle
(c) Short Condor
Range Bound (a) Double Top

(b) Christmas Trees
(7) By practicing such type of trading strategy, one can earn unlimited profits if the
market turns in favorable zone & if the market moves other way round, loss
exposure is limited to a certain extent.
(8) There are certain Opportunistic trading strategy in the market in which one can earn
fixed amount of profit, irrespective of the market movement, such type of
Trading strategies are known as Arbitrage Trading strategies which are not
readily available but one has to grab such opportunities from the market from
the price movements.

CONCLUSION:
There are many indicators which can be used while trading in derivative market but
widely used & more effective are open interest & put call ratio. Investors can study
both together & can arrive at meaningful trend. These indicators can also be jointly
used with technical analysis indicators to find out profitable buying & selling
points.
Trading strategy can be framed by individual taking several considerations like

view for the market-bullish, bearish or uncertain, type of trader-hedger, speculator
or arbitrageur, risk appetite, period of investment, type of analysis-fundamental or
technical analysis etc.But important thing is to minimize loss & take the right
opportunity. Now a day markets are very volatile, so it is in the interest of investors
to frame volatile market strategies as stated above rather than to have one view.
Investors should have constant look on the market to execute opportunistic
strategies which gives fix amount of profit irrespective of market fluctuations.
Investors rather than keeping one view bullish or bearish its better to have volatile
market strategy with limited loss and limited profits.

BIBLIOGRAPHY
BOOKS:
 OPTIONS AND FUTURES –IN INDIAN PERSPECTIVE

 D. C. PATWARI
 OPTIONS, FUTURES AND OTHER DERIVATIVES
 JOHN C. HULL
 TECHNICAL ANALYSIS OF FUTURES MARKET
 JOHN MURPHY
 FUTURES AND OPTIONS
 N.D. VOHRA & B.R. BAGRI
WEB SITES:
www.sebi.com
www.bseindia.com
www.nseindia.com
www.derivativesindia.com
www.hathwaysecurities.com
www.moneycontrol.com
www.arcadiastock.com
www.anagram.com
SOFTWARE:
• CAPITALINE NEO
• ODIEN DIET OF NSE

GLOSSARY
American-style Option: An option contract that may be exercised at any time between the
date of purchase and the expiration date.
At-the-money: Option whose exercise price is the same as the market price of the
underlying asset.
Bear: Someone who thinks market prices will decline.
Bull: Someone who thinks market prices will rise.
Call: An option contract granting the purchaser the right to buy the underlying instruments
at the agreed strike price. A call obliges the seller to sell the underlying instrument at the
agreed strike price, if the option is assigned to him.
Cash settlement: Settlement of a contract by payment or receipt of a settlement amount

instead of the physical delivery of the underlying asset.
Closing: Conducting a transaction, which offsets the original trade and liquidates an
existing position.
Contract unit: The number of units of the underlying instrument on which the contract
bears, i.e. contract size. This may vary according to the underlying on which the contract
bears.
European-style options: An option that can be exercised by the buyer only on the contract
expiration date.
Exercise: A decision, reserved for the option holder, to request execution of the contract.
Expiration date: The date on which the option contract expires.
Hedge: A conservative strategy used to limit investment loss by effecting a transaction,

which offsets an existing position.
Holder: The party who purchased an option.
In-the-money: A call is said to be "in-the-money" when the value of the underlying

instrument is greater than the option strike price. A put is "in-the-money" when its strike
price is greater than the value of the underlying instrument.

Intrinsic value: The intrinsic value of an option is the difference between the actual price
of the underlying security and the strike price of the option. The intrinsic value of an
option reflects the effective financial advantage that would result from the immediate
exercise of that option.
Liquidity: Market situation in which quick purchase or sale of a security is possible

without causing substantial changes in prices.
Long position: An investor’s position where the number of contracts bought exceeds the
number of contracts sold. He is a net holder.
Lot size: Number of contract you want to buy or sell
Maintenance Margin: A set minimum margin that a customer must maintain in his
margin account.
Mark-To-Market: Valuation of a financial instrument according to the current trading

value (price) on the exchange.
Open interest: The number of outstanding option contracts in the exchange market or in a
particular class or series.
Option: A contract that conveys the right, but not the obligation, to buy or sell a particular
item at a certain price for a limited time. Only the seller of the option is obligated to
perform.
Out-of-the-money: A call is "out-of-the-money" when the value of the underlying

instrument is less than the option strike price. A put is "out-of-the-money" when its strike
price is less than the value of the underlying instrument.
Premium: The price of an option–the sum of money that the option buyer pays and the
option seller receives for the rights granted by the option.
at the agreed strike price. A put obliges the seller to purchase the underlying nstrument at
the agreed strike price, if the option is assigned to him.
tion: An investor’s position where the number of contracts sold exceeds the number of
contracts bought. The person is a net seller.
Spot Price: Refers to the underlying current market price.
Strike price or exercise price: The price at which the option holder may purchase (in case
of call) or sell (in case of put) the underlying instrument.
Time value: It is determined by the remaining lifespan of the option, the volatility and the
cost of refinancing the underlying asset (interest rates).
Time value = option price - intrinsic value


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INTERNATIONAL INSTITUTE OF BUSINESS STUDY

Dr. Hitesth Ruparel Prof. Anjali Choksi

INTERNATIONAL INSTITUTE OF BUSINESS STUDY

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INTRODUCTION TO INDIAN CAPITAL MARKET 1

3 DEVELOPMENT OF DERIVATIVES MARKET IN INDIA 9

5 STOCK MARKET DERIVATIVES 15

8 INDICATORS OF INVESTING IN FUTURES & OPTION 62

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PAST OF SHARE MARKET

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Derivatives in mathematics, means a variable derived from another variable. Similarly in

The need for a derivatives market

The derivatives market performs a number of economic functions:

Factors driving the growth of financial derivatives

1. Increased volatility in asset prices in financial markets,

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A forward contract is a particularly simple derivative. It is an agreement to buy or sell an

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Types of Traders in Derivatives Market:

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• Capitaline Neo software

• Odin diet Software

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INTERNATIONAL INSTITUTE OF BUSINESS STUDY

Futures & Options

Instruments available in India

Index Futures Futures on Options on

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2) mid month &

BSE also offers similar products in the derivatives segment

• Minimum contract size

The Standing Committee on Finance, a Parliamentary Committee, at the time of

• Lot size of a contract

INTERNATIONAL INSTITUTE OF BUSINESS STUDY

INTERNATIONAL INSTITUTE OF BUSINESS STUDY

Introduction of futures in India

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Interest Bearing Assets

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Concept of basis in futures market

• Basis is defined as the difference between cash and futures prices:

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Why Sensex Futures?

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Interpreting Futures Data

Theoretical way of Pricing Index Futures

S&P CNX Nifty Futures

A futures contract is a forward contract, which is traded on an Exchange. NSE commenced

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The underlying index is S&P CNX NIFTY.

INTERNATIONAL INSTITUTE OF BUSINESS STUDY