Final Dissertation Report Gananjay 1901008

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Hedging The Portfolio Using Options Strategies
Technical Report · September 2021
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University of Mumbai
Hedging The Portfolio Using Options
Strategies
Submitted in the partial fulfillment of the requirements
for the degree of
Masters in Technology
By
Gananjay Sandeep Thanekar

Roll No: 1901008
University Registration No.
Guide
Prof. Zaheed Shaikh
Department of Computer Engineering

K. J. Somaiya College of Engineering, Mumbai-77
(Autonomous College Affiliated to University of Mumbai)
Batch 2019 - 2021

Certificate
This is to certify that the Final Year Project Report on “Hedging The Portfolio
Using Options Strategies” is bonafide record of the dissertation work done by
Gananjay Sandeep Thanekar in the year 2019-2021 under the guidance of Prof.
Zaheed Shaikh Department of Computer Engineering in partial fulfillment of
requirement for the Masters in Technology degree in Computer Engineering of
University of Mumbai.
Guide Head of the Department
Principal
Date: 31/07/2021
Place: Mumbai-77
Certificate of Approval of Examiners
We certify that this Final Year Project Report on Hedging The Portfolio Using
Options Strategies is bonafide record of dissertation work done by Gananjay
Sandeep Thanekar for partial fulfillment of requirement for the Masters in
Technology degree in Computer Engineering of University of Mumbai.
External Examiner / Expert Guide / Internal Examiner
Date: 31/07/2021
Place: Mumbai-77
Declaration
I declare that this written report submission represents the work done based on my
and / or others’ ideas with adequately cited and referenced the original source. I
also declare that I have adhered to all principles of academic honesty and integrity
as I have not misinterpreted or fabricated or falsified any
idea/data/fact/source/original work/ matter in my submission.
I understand that any violation of the above will be cause for disciplinary action by
the college and may evoke the penal action from the sources which have not been
properly cited or from whom proper permission is not sought.
________________________________________
Signature of the Student
Gananjay Sandeep Thanekar

________________________________________
Name of the Student
1901008
________________________________________
Roll No.
Date: 31/07/2021
Place: Mumbai-77
Abstract
In stock market operations, the data computing logic and processing power can be harnessed to
offer one a competitive advantage over the other. The stock markets over the years have
provided excellent investment returns, but the amateur traders aren’t able to take its advantage
thanks to obsession changing market and losing money. During this research work, the principles
of different options are applied on historic data of Stocks/Nifty/Bank Nifty Option segment to
realize meaningful knowledge and insights within the sort of strategy, which can help users in
taking proper buying or selling decisions while trading in Index/Stocks. This capability gives the
choice trader a leading edge over novice traders. By following the right strategy, the user is
really trying to attenuate the danger of a loss and increasing the probabilities of earning profits
This project will be focused on various Options Strategies. It will comprise of eight different
strategies which are mainly used in the Options Market. This strategies will be plotted using
Python as the basic programming language and will be using NumPy and Matplotlib libraries of
python which will help us to plot the pay-off diagram of that particular option strategies.
The motive of this project is to help the Retail Investors of the Share Market, as they are the
individuals who are most prone to losses because they don’t take a hedge to their portfolio.
Key words: Stock Market, Option, Option Greeks, Hedging, Portfolio, Nifty, Bank Nifty,
Money Management, Option Spread Trading, Option Strike Price, Option Premium, Long
Option, Short Option, Put Option, Call Option
i
Contents
List of the Figures...……………………………………………………………………….….iv
List of Tables..………………………………………………………………………………...vi
Nomenclature……………………………………………………………………………...…vii
1 Introduction……...……………………………………………..………………………
1.1 Background……………………………………………………………………..….1
1.2 Problem Statement…………………………………………………………………1
1.3 Motivation………………………………………………………………………….1
1.4 Scope…………………………………………………………………………….....2
1.5 Organization Of Report………………………………………………………...…..2
2 Literature Survey……………………………...…………………………..………….3
3 Hedging Strategies Using Options…………….………………………………………
3.1 What is Hedging? ………………...………………………………………...…….18
3.2 Basic Option Terms………..……………………………………………………...19
3.3 System Architecture..…………….……………………………...………………..21
3.4 Call Option Buyer Strategy…….……………..…………………………………..22
3.5 Call Option Seller Strategy..………………………………………………………23
3.6 Put Option Buyer Strategy….……………………………………………………..24
3.7 Put Option Seller Strategy……………………………………………………...…25
3.8 Bull Call Spread Strategy…………………………………………………………26
3.9 Option Strategy Defined by Hybrid combination 1……………………………….28
ii
3.10 Bear Put Spread Strategy…..……………………………..….…..………............... 29
3.11 Protective Put Strategy……………….…………………..……………………….. 30
3.12 Covered Call Strategy…………………………… ………………………………. 31
3.13 Option Strategy Defined by Hybrid combination 2…………..……………………… 32
3.14 Option Strategy Defined by Hybrid combination 3……………………..……………. 33
4 Implementation………………………...……………………………….………………
4.1 Role Of Python In Options Trading……………………..……...………….…….35
4.2 Usage Of Different Python Libraries ……………………………………………..36
4.3 Matplotlib……...……………………………………………………………….....37
4.4 Implementation Plan…………………………………………………………...….38
4.5 Execution Of Functions…………………………………………………………...39
4.6 Results….………...………………………………………………………….……41
5 Conclusion And Scope For Future Work………………………………………......53
6 Publications of the Candidate…………...………………………………………......55
References..…………………………………………………………………………..56
Acknowledgement……………………………………………………………………58
iii
List of Figures
2.1 Returns Of Bull Spread…………………………………….…..………....................... 5
2.2 Black-Scholes Call Option Price……..……………………………………………….. 7
2.3 Number of Shares for Hedging vs. Horizon Time ………..…………………………. 9
2.4 Model Creation Process……………………….. ……..……………………………… 11
2.5 Training and Testing Data……………………………..………………..……………. 13
3.2.1 Illustration of Call Option Contract…………...……….………………...…………… 20
3.2.2 Illustration of Put Option Contract………………. ………………………………….. 20
3.3 Proposed System Architecture… ……………............................................................. 21
4.1 Implementation Gantt Chart For First Stage Dissertation…………………………… 38

Nifty Line Chart……………………………………………………………………...
4.2 41
4.3 Call Option Buyer Strategy…………………………….……….....…………………. 42
4.4 Call Option Seller Strategy…………………………………. …………………..….……….. 42
4.5 Put Option Buyer Strategy………………………………….……………………..……….. 43
4.6 Put Option Seller Strategy…………………………………………………………...………. 43
4.7 Nifty 50 Tailing All the Data from 01/01/2007-04/01/202………….……..………… 44
4.8 Bull Call Spread Strategy……………………………………….…..……………………. 44
4.9 Option Strategy Defined by Hybrid Combination 1…………………………………….……. 45
4.10 Bear Put Spread Strategy…………………………………………. ………………...……….. 46

Protective Put Strategy………………………………………………………...……...
4.11 46
4.12 Covered Call Strategy……………………………………………………………………..…. 47
iv
Option Strategy Defined by Hybrid Combination 2………………………………….
4.13 48
Option Strategy Defined by Hybrid Combination 3………………………………….
4.14 49
Comparative Analysis of Option Strategies……………………………………….….
4.15 50
Sample Snippet of HDFC BANK Future data being imported by the system with the
4.16 51
help of NSE-py………..………………………………………………………...
Sample Snippet of HDFC BANK 1500 CE Strike Option data being imported by the
4.17 51
system with the help of NSE-py…………………………………………………
Sample Snippet of HDFC BANK 1500 CE Strike Option data being plotted by the
4.18 52
system with the help of NSE-py……..……………………………………………...
v
List of Tables
2.1 Call and Put Weekly options of TAIEX (PM 13:30, 2017-01-13) …………............... 4
2.2 Bull Spread generated by the system………………………………………………….. 4
2.3 Simulation Case……………………………………………………………………….. 12

2.4 The Price of SET50, call option and the difference of the put option………………… 16
vi
Nomenclature
VIX Volatility Index
Xt Autoregressive Moving Average
E[Xt+1] Error of Variance
€t GARCH Model Error Process
T Time remaining until the expiration of the options
r Risk Free Rate of Interest
K Exercise Price
PE Put Option
CE Call Option
vii
Chapter 1
Introduction
This chapter presents an entry into the report starting with the background of Options,
followed by the problem that is being tackled. The motivation behind choosing this problem
is also stated. This is followed by the Objectives, Scope and Organization of this report.
1.1 Background
Options are an important type of derivative that provides their owner with the right but not an
obligation to a payoff determined by the future price of the underlying asset. But the real purpose is
not just to take a speculative view on Stocks and Indices, rather the real purpose of Options is to
help you mitigate and manage your risk more precisely. The main aim of Options is to provide the
ability to precisely define the risk of your Portfolio and also work out your risk under different
market scenario. The most conservative use of Options is to use them as a Hedge Strategy to
protect your Portfolio. Insuring your Stock Investments is no different from insuring your car or
mobile. But, in the world of investing good protection can be a real drag on your returns.
1.2 Problem Statement

The trading system in India as well as in some countries abroad is manipulated and sometimes
flawed and hampered by those with large capital to suit their personal benefits. For overcoming
this, we will be taking help of Options Strategies so we can analyze the price moment. The real
purpose of option trading is not just to take a speculative view of stocks, rather the real purpose
of trading is to help you mitigate and manage your risk more precisely. With the help of Options
Trading using Python a trader can be safe and mint some money from the stock market.
1.3 Motivation
The main aim of this project is to help Retail Investors who are subjected to the speculations in
the share market, as they will use the Options Trading so their portfolio will ensure that their
hard-earned invested fund stays safe amid various market scenarios. Playing with Options will
also make an extra amount of money which can be reinvested in the stock market again. It’s
1
better to be safe with your portfolio, so as to avoid unnecessary loss.
1.4 Scope
 To safeguard the portfolio from any market speculations for long term as well as short term.
 Tracking various option strategies which will try to reduce your loss, and will increase your
net profit.
 To train a Retail Investor on maintain the risk as low as possible by deploying various
categories of Options.
1.5 Organization of report

Chapter 2: This chapter includes the literature survey that I have done to understand the
landscape around this special topic.
Chapter 3: This chapter dives into the actual topic i.e. Hedging using Options Strategies, its role
in various strategies, other methods that might be available to tackle similar problems.
Chapter 4: This chapter covers a real-world use case in the form of coding the Eight Options
Strategies with the help of Python.
Chapter 5: This chapter provides a conclusive analysis of the stage one report.
Chapter 6: The final chapter provides a list of publications done by the candidate.
2
Chapter 2
Literature Survey
This chapter presents an overview of the literature that was referred while studying this
topic and the technologies involved. It presents a brief description into what these papers
have to offer to build upon for this project. It also presents the gap analysis at the end and
the conclusions which came out after reading these papers
Money management is one of the most important issues in financial trading. [1] Many skills of money
managements are based on the Kelly criterion, which is a theoretical optimization of bidding an
optimal fraction for position sizing. However, there is still a large gap between the theory and the real
trading for money management. In this paper, we design an option trading strategy via Kelly criterion.
While the price movements of options are highly volatile, various options' portfolio can be formed by
long or short at different strike prices to pre-lock the losses and profits; then we have a fixed profit
and loss distribution via holding an option portfolio. Consequently, the Kelly criterion can be applied
to the options' trading for calculating the optimal bidding fraction. We propose a method for option
trading, in finding the profit table option portfolio by bidding optimal fraction. Compared with prior
works, our proposed model is a novel approach for options' trading with the money management of
position sizing.
This work provides an options trading strategy which may apply the theoretical optimization for
money management. In options trading, there exist various options portfolio methods, such as bull
spread, and bear spread utilizing the various strike prices of Call or Put options. Once the portfolio is
set, the risks are moderately controlled; the chances distribution is known and glued if we hold the
positions till the settlement date. To use the Kelly criterion in our trading model, the only unknown
part is that the distribution of the underlying index prices upon settlement. The strategy proposed
during this work can operate without human intervention. The development of the portfolio and
therefore the bidding fraction are completely based on the historical data, and therefore the quotes on
the underlying options.
Although the Vince's method considers the optimal bidding fraction under multiple odds, it still can't
be totally perfectly applied to real-world trading. For the case of real trading in financial markets, the
win rates and therefore the odds distributions vary as time goes on. One among the talents to repair the
chances distribution is using the trading mechanisms, like cut the loss and stops the profit. However,
3
even with the pre-set stop-profit and stop-loss mechanisms, which seem to repair the chances a priori,
the win rate still changes with different threshold for stop-loss or stop-profit. The above issues may
cause the traders suffer the large risks when using Vince's Opt. f . Therefore, some studies suggest
using the half Kelly fraction, with a compromise on optimality. As a result, the theoretical aspects of
the optimal bidding fraction are widely discussed but there are few real-world applications. The
elemental unsolved difficulty is the unpredictability of odds distributions altogether sorts of trading
strategies. Besides, it's not practical to assume the trader can play the infinite number of trading. The
chances and win rate can also not be according to actual outcomes as time goes by for an extended
time.
Table 2.1- Call and put for weekly options of TAIEX (PM 13:30, 2017-01-13)
We use the TAIEX index value at the closing of 01/13/2017. We consider the options at the money as
examples (refer table I, and intention to find the most profitable portfolio. Note that the reverse of bull
spread is the bear spread. So we consider the bull spread, without loss of generality. There are
possible combinations, given as follows:
Table 2.2 - Bull Spread generated by the System
We individually calculate the return distributions of all the 10 portfolios shown above. Note that in the
cases where the return is less than 1, the games are not favorable. In such cases, we will calculate the
returns of the corresponding bear spread, that is, the ``Long'' is changed to ``Short'', and the ``Short'' is
4
changed to ``Long''. Our experimental outcomes are as follows. Because the ``Long 9300 Call @ 90;
Short 9350 Call @
54'' is calculated as unfavorable in Section III, we calculate the bear spread positions, ``Short 9300
Call @ 90; Long 9350 Call @ 54'',
Fig 2.1- Returns of Bull Spread
The return of bull spread ``Long 9300 Call @ 90; Short 9500 Call @ 5.5'' on PM 13:30, 2017-01-18
for bidding different fraction.
We propose a completely unique approach for options trading supported Kelly criterion. We avoid the
challenges find trading signals of traditional strategies. Instead, we adopt the optimal fraction within
the profitable options portfolio and hold the positions until the expiration date. Note that we don't
consider stop loss & stop profit in our model for the rationale of reducing the uncertainty in trading
strategies. Actually the thought during this work still are often applied to arbitrary trading time
periods by stop-loss & stop-profit rather than cleaning positions at the expiration date. We may adopt
the choice pricing model such as Black-Scholes to estimate the worth of time-decay, and apply the
results to predict the distributions of rising/falling points. Consequently, we may choose the right time
periods to back-test the historical data for locating the distributions of rising/falling points. Supported
the quotes, we calculate the empirical profit and loss distribution, and use Kelly criterion to obtain the
optimal bidding fraction on option portfolio. One of the benefits of trading option spread is that the
fixed distribution of profit & loss. We may select the foremost profitable portfolio once we all know
5
the distribution of the market index. However, nobody can accurately predict the distribution of the
market index. We just try our greatest to and the estimated distribution and hope it's on the brink of
the important market distribution. The error between estimated and real distributions causes the loss
within the trading. Consequently, the performance of our method depends on the estimated market
distribution and every one the work about investing strategies is to predict the market distribution
rather than investing traditional trading strategies (indicator, signal, and rules).
[2] The delta-gamma Approximation (DGA) is a technique that is often used for hedging options in
practice. For its simplicity, it is widely used because it can immediately indicate the number of shares
of the underlying assets to be reinvested to hedge the original investments. However, the DGA
requires that the change of the underlying asset price to be small for an acceptable performance.
Therefore, when this change of the underlying asset price is large, then the hedging performance is not
acceptable implying losses, and frequent rebalancing operations of the portfolio may be needed. But, a
rebalancing operation has an associated transaction fee and a high frequency of rebalancing operations
imply high additional costs. Hence, there is a trade-off between losses due to low performance of the
DGA (when the change of the underlying asset price is large) and additional costs due to rebalancing
operations to compensate the low performance of the DGA. In the present work, we propose a
hedging framework that improves its performance with the purpose to reduce losses by improving the
quality of approximating the option prices. This framework consists of estimating the implied
volatility using the Markov chain Monte Carlo, predicting the change of the underlying asset price
using the functional data analysis, and approximating the option price using the locally weighted
regression.
The option hedging is usually realized by replicating the changes of option prices with the delta-
gamma Approximation (DGA). It’s largely employed by practitioners thanks to its simplicity and its
good performance for little changes of the underlying asset price. This approximation method works
well when the change of the underlying asset price remains small. However, when this alteration
becomes large, the choice price estimated by the DGA is often significantly different from the
particular value. Hence, before the change of the underlying asset price becomes large, rebalancing
operations are demanded to correct the error introduced in estimating the choice price using the DGA.
However, rebalancing operations imply transaction costs, and, therefore, frequent rebalancing
6
positions could also be unattainable. Hence, there's a trade-off between costs incurring from frequent
hedging operations and losses resulting from the wrong performance of the DGA. During this work,
we propose new option hedging methods which will outperform the DGA even for giant charges of
underlying asset prices for various values of moneyness, strike, implied volatility, maturity time and
time horizon. These methods can improve the accuracy of approximating option prices (hence, no
need to rebalance or, at least, to scale back the amount of rebalancing operations. These methods
consist first of forecasting the change of the underlying asset price using the functional data analysis
(FDA) and estimating the implied volatility using the Markov chain Monte Carlo (MCMC). Then, the
choice price is predicted using the locally weighted regression (LWR). In this work, we consider
European call option prices, while the methods that we propose are often easily extended to place
option prices also.
Fig 2.2- Black-Scholes call option price
We observe from the results that the relative error in estimating the decision option prices using
the EDGA is best than those of the DGA, but it can still be significant when the change of the
underlying asset price is large surely parameter values. Therefore, we propose another method
(but, this time, an algorithmic approach) that can offer results of higher performance. This
method may be a combination of forecasting the change of the underlying asset price (using the
functional data analysis (FDA), estimating the implied volatility (using the Markov chain Monte
Carlo (MCMC)), and predicting the decision option price (using the locally weighted regression
7
(LWR)). Notice that for both the DGA and therefore the EDGA, we forecast neither the change
of the underlying asset price at horizon time t (vt) nor the implied volatility at horizon time t (t).
However, for this new method, we suppose that both vt and t change with time and wish to be
forecasted.
Estimating the implied volatility using the Markov chain Monte Carlo Gibbs sampling may be a
Markov chain Monte Carlo algorithm for obtaining a sequence of observations which are
approximated from a multivariate probability distribution when direct sampling is difficult. This
sequence is often wont to approximate the joint distribution, to approximate the marginal
distribution of 1 or a subset of variables, and to compute an integral like the arithmetic mean of
some variables.
With the aim to ascertain the effect of the tactic proposed in this work, we consider the stock of
Bank of America because the underlying asset. We consider it for a period that ranges from
March 29, 2012 to March 28, 2017 published within the Yahoo! Finance website. This stock
along the considered period has the price. Especially, we use the FDA/FDA.USC R package
with the functional principal component analysis approach considering 11 basis functions for
both the model parameters and therefore the variables. The periodicity that we consider is 132
days. Then, we obtain the absolute and relative test forecast error. For the prediction of the
implied volatility using the Markov chain Monte Carlo method, we consider the subsequent
aspects. We only affect the ecu call option on the contract writer (seller) side. The choice
contract writer (seller) can hedge her investment by investing on the underlying asset at any time
instant before the maturity time. During this work, we only affect a single-period hedging and
consider that the bid and therefore the ask prices are equal (i.e., zero bid-ask spread). The risk-
free rate of interest is meant to be known and constant at 2.5%.
In this work, we show two novel methods to hedge European call options: extended delta-gamma
approximation (EDGA) and an algorithmic approach that is based on forecasting the change of the
underlying asset price (using the functional data analysis (FDA)), estimating the implied volatility
(using the Markov chain Monte Carlo (MCMC)), and predicting the European call option price (using
the locally weighted regression (LWR)). We show that our both methods can overcome the vastly
8
used hedging tool known as the delta gamma approximation (DGA) even for large values of the
change of the underlying asset prices.
Fig.2.3- Number of shares for hedging vs. horizon time
The author [3] developed a simulation program for trading Nikkei stock market index options and
verifies the validity of the volatility index (VIX) prediction model proposed by Suwa. They simulated
two cases from 18 Nov. 2014 to 29 Jun. 2016. One case involved a benchmark of trading every day
during that period and therefore the other was in accordance with the buy/sell/hold instructions of
Suwa et al.’s VIX prediction mode.
In computational science, it's important to not only understand social phenomena but also show that
they are useful in society. It's an equivalent in finance, it's important to not only understand the factors
affecting various stock indexes but also to point out that they're useful. There are many studies on
finance that involved investigating the factors that affect the stock price level by messages posted on
social networking services. For instance, neural networks were wont to forecast the market trend of
the next day, forecast the future trend of state bonds using text mining of an economic report, and
analyzing Wall Street Journal (WSJ) columns and therefore the Nikkei stock market index that
specialize in news. Suwa et al. focused on the Nikkei volatility index (hereafter, the VIX), which
expresses investor fear of the Japanese Stock Exchange.
9
Since the VIX expresses the fear of investors, it is a closely related the risk of depression. Therefore,
the VIX is an important indicator for investment judgment. To more appropriately measure the danger
of fear that investors have, they created topic models specific to social media of stock trading and
located topics that are actively posted in response to fear. They proposed a model of forecasting the
rise in the VIX to expand their model. Their model is beneficial for investment activities like risk
aversion and volatility trading.
They analyzed the Yahoo! JAPAN Stock Bulletin Board (hereafter, BBS), which is that the social
media service of Japan's largest stock trading site, as an empirical study. They classified these
messages by employing a topic model and calculated the posting rate per topic in chronological order.
To forecast the rise within the VIX, their VIX forecasting model used a logistic regression with each
topic posting rate as a feature quantity.
In finance, predicting not only stock returns and volatilities but also various other market indices is
beneficial because it results in revenue and risk aversion. Many researchers have studied this with
various approaches. They developed a neural network using the previous day's opening price, price,
high price, low price, and volume to predict the trend during a stock price for the next day. They
showed the likelihood of supporting investment behavior like stock price fluctuation using simulation.
Izumi et al. analyzed economic reports published by financial institutions using text mining to predict
future market trends. They found that within the simulation of managing Japanese government bonds,
their method may result in a rise in revenue. There are many financial studies on journalism. Tetlock
focused on journalism to predict the trend in US stock markets. He developed a negative factor using
the principal component analysis of the meaning of words in WSJ articles. He suggested the
likelihood of creating a profit in a zero cost transaction through this trading simulation. However, he
concluded that revenue won't be obtained if transaction fees and market liquidity are taken under
consideration. Now they analyzed the connection between the rising and falling of the Nikkei stock
market index futures and news articles using machine learning to predict the fluctuation in these
futures. He developed a news-evaluation model that can result during a significant increase in
revenue. The author also filtered articles using category classification and machine learning of Web-
news words to predict the trend within the Nikkei stock market index. They found that they will select
articles affecting the Nikkei stock market index price.
10
Our focus is on developing a prediction model of increase in VIX by analyzing messages on a stock
BBS. However, to verify the effectiveness of the model, it is necessary to simulate trading using past
stock exchange data to determine whether this model can generate revenue. For example, they
conducted a stock trading simulation using historical daily stock prices of twenty stocks from NYSE
and SET markets from 2015 to 2016 to verify a trading strategy supported their learning method to
combine a group of technical trading signals that uses a modified Particle Swarm Optimization. They
verified the effectiveness of their learning method.
The VIX is that the arithmetic mean of the volatility (standard deviation of return) of the Nikkei stock
market index, given by the equation:
The very fact that the VIX increases means the standard deviation of the index return will increase
within the near future. In other words, it means the index will significantly increase or decrease within
the near future. If we use the Nikkei stock market index options listed on the Osaka Stock Exchange,
we'll have the chance to earn money by increasing volatility. As shown within the Black-Scholes
Option differential equation, option price increases as volatility increases. Thus, there could be a profit
opportunity
Fig 2.4- Model Creation Process
11
First, Japanese messages posted from Yahoo! JAPAN's stock BBS were extracted. Analysis data
included messages that were hidden on the homepage. These messages were then decomposed into
words using morphological analysis. A Latent Dirichlet allocation (LDA) topic model was produced
to extract topics from these words. Finally, a prediction model was constructed that predicted the
increase the VIX by Random Forest using the posting rate of every topic as a feature quantity, for
model construction, the servers of Yahoo! Japan.
They used morphological analysis to extract the information from each message. Morphemes were the
littlest linguistic unit with meaning in linguistics. Through morphological analysis, they examined
what percentage words were included in each message. They used MeCab as a morphological
analyzer. To predict the increase in the VIX, they constructed a model of predicting the increase in the
VIX through machine learning using the value of each topic as the feature quantity. As a result of their
experiment, the number of feature quantities was 1212, and the number of the feature quantity about
topics was 1200. The number of feature quantity about the VIX and the number of daily messages was
12.
The main advantage of option trading is that it's possible to target large returns with less funds. Profit
of option trading can be earned either when the market is flat (box market) or when it moves
significantly (bull or bear market). The choice theoretical price is calculated using the Black-Scholes
differential equation. During this equation, one among the parameters is volatility. Therefore,
predicting the volatility of the Nikkei stock index is vital for option trading. One indicator for
predicting this volatility is that the VIX. Volatility trading is possible using options. Volatility trading
is completed to predict the volatility of the Nikkei stock index and choose on a trading strategy that
matches the fluctuation of the index. As a volatility strategy using options, there are straddle strategies
combining two options or butterfly strategies combining three or four options. Since the author’s
model portfolio predicts that the VIX will move significantly, they have used a brief butterfly strategy.
Table 2.3- Simulation Case

12
They used the exercise price of an at the cash call and an at the cash put closest to the opening price of
the Nikkei stock index. The exercise price of an out of the cash call was 500 yen above that of an at
the cash call. For the exercise price of the within the money call, we used the worth that was 500 yen
but the exercise price of at the cash call. The exercise price of an out of the cash put was also 500 yen
but that of an at the cash call. For the exercise price of and within the money put, we used the worth
that was 500 yen above the exercise price of an at the cash call. If there was no price when setting a
replacement position or the prices weren't out of the cash , no trading was done.
Moreover if the price of out of the cash wasn't larger than that of at the cash, or the worth of at the
cash wasn't larger than that of within the money, no trading was done because these prices were
considered invalid. The position is settled at the opening price on the day when an definite quantity of
a gap price of the Nikkei stock index moved 500 yen quite that of the setting date. If the Nikkei stock
market index didn't move quite 500 yen within 10 trading days, this position was settled in 10 trading
days.
Fig 2.5- Training and Testing Data
The butterfly spread constructed only with within the money options and out of the cash options are
cases 3 and 4, respectively. During this study, we used the opening price because the trading price.
The exercise price used for choosing the at the money option used the opening price of the Nikkei
stock Index. However, a number of the choices may have had very low liquidity. Therefore, the
timestamp of those options’ opening prices might not are 9 AM, i.e., the opening price of the Nikkei
stock market index. If these timestamps of every option were different, we couldn't build butterfly
spreads. Therefore, we believe that the simulation results of case 4 should be kept in reference in our
13
study. To research now, the author has to develop a simulation that uses intraday data with time stamp
instead of opening price, which is for future work. However, in the simulation of the put option, profit
increased but was negative. If the Nikkei stock market index is near the center of the exercise price
(example: Nikkei stock market index = 20,150 yen). They have simulated a case during which the
position isn't set. However, improvement within the simple trading method didn't improve P/L.
Therefore, it's necessary to enhance the accuracy of Suwa et al.s prediction model.
Investment [4] in financial derivatives becomes popular round the world. In Thailand, the Thailand
Futures Exchange (TFEX) which may be a place where financial derivatives are traded has also been
a beautiful recently. One among the common question of investor is what the worth of monetary
instrument are going to be. There are several models has been utilized in forecasting option price. The
foremost popular one is that the Black-Scholes option pricing formula. During this paper, we
investigate a widely-used statistical model, GARCH model to forecast the option price. The author
uses SET50 option as case studies and compares the result with a well known model, Black-Scholes
model.
One of the interesting derivatives that are traded in TFEX is an index option. An index option may be
financial derivatives that give the holder the proper, but not the requirement, to shop for or sell a
basket of stocks at an agreed-upon price and before a particular date. An index option is analogous to
other option contract that allows investor to take advantage of an expected market move or reduces
the danger of holding the underlying instrument. It is little question that the majority or all types of
investment involve some sorts of risk. One among the common question of the investors is what the
worth of the choice are going to be. If the traders could know the choice price within the future, they
might make lots of profit. Many methods are utilized in option price prediction. Basically, Black-
Scholes option pricing formulas are going to be the choice if anyone wants to cost the choice
Even though GARCH model isn't a well-liked alternative for option pricing, it's been frequently
utilized in financial estimation recently. The author applies Multivariate Generalized Autoregressive
Conditional Heteroskedasticity (MGARCH) model with dummy variables for weekly data. They
found that the financial crises from 1998 and 2008 don't have any significant impact on returns.
However, the crisis in 2008 increases the stock return volatilities across all of the four markets. In this
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paper, we study the utilization of GARCH model in forecasting the worth of SET50’s options. A
statistic may be a set of knowledge collected over time. To analyze statistic data, it's to be stationary.
Otherwise, the statistics values are going to be non-standard distribution, which cannot be consider to
compare with the quality distribution table. If we compare with the table, it's going to give significant
values higher than reality. There are many models are often utilized in forecasting. Normally, different
models have different conditions of use. As an example, For an Autoregressive (AR) model, the
previous observations is employed to work out the present observations; while during a Moving
Average (MA) model, it uses the previous residuals to work out the observation.
One of widely used forecasting models is Autoregressive Moving Average (ARMA) model which is
The error of variance is
If the variance of Et is not a constant, we can estimate the residuals by
When vt is a white noise process, The expected value of
This type of equation is called Autoregressive Conditional Heteroscedasticity (ARCH) model, which
constructed by Engle in 1982.
GARCH model has been developed by Bollerslev in 1986, which would give the error process is
It uses AR and MA processes to find the variance of Heteroscedasticity variance type.

The procedure for locating the GARCH model and therefore the meaning of all variables in Black-
Scholes formula which we'll use to forecast the choice price. During this research, we explore the
costs of call and put options of SET50.
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In order to urge the GARCH model of the given option prices, we first got to find the data; the choice
price during this case that satisfy conditions of GARCH. To use GARCH the info and test whether it's
stationary by using the Augmented Dicky-Fuller (ADF) test. If it's not stationary, we can use the
difference of the info instead if it's stationary. If the info and its difference aren't stationary, we'll find
a replacement set of knowledge. Once we get the stationary data, we'll then calculate the GARCH
parameters which will be utilized in the method of forecasting the choice price.
Table 2.4- The price of SET50, call option and the difference of the put option
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The meaning of variables in Black-Scholes model is:
• The worth of common shares (S0): The worth of S0 is the daily price of common shares. In our case,
it is the daily price of SET50.
• Exercise price (K): the worth of K is that the exercise price of convertible which the knowledge from
the issuer of options.
• Risk-free rate of interest (r): Within the latter, the government is issuing only a few government
bonds makes no reference rate or benchmark rate of interest, which represent the real rate of interest.
However, the state enterprise bonds are often defined because the reference rate. Therefore, this study
will use the deposit rate is that the benchmark rate.
• The time remaining until expiration of the choices (T): Expiry date of options available from the
market.
• The stock price volatility (σ): The worth of σ can be computed by the info.
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Chapter 3
Hedging Strategies Using Options
This chapter covers the fundamentals of Hedging Options which forms the backbone
technology of this project. In this chapter the basics of each strategy that is going to be used
is also explained in simple language.
3.1 What is Hedging?

Hedging is referred to as purchasing a resource intended to decrease the danger of misfortunes
from another resources. [5] Supporting in money is a danger the executives system that manages
diminishing and dispensing with the danger of vulnerabilities. It assists with confining
misfortunes that may emerge because of obscure changes in the cost of the venture. It is a
standard practice followed by speculators in the financial exchange to protect their ventures from
misfortunes. Hedging through Options, it includes options of calls and puts of assets, which
facilitate to secure your portfolio directly.
In Hedged Positions Profit is limited, but loss is also limited which is the main motive.
Let [6] us take a small example, Mr. XYZ hold 250 shares at Rs. 2000 of Reliance Industries and
he is feeling discomfort due to quarter result which is not as per their expectation. For
minimizing risk in spot price Mr. XYZ takes a contrary position in Option by taking a one
contract of Reliance Put Option Strike Price of 2000 and pays a Premium of Rs. 35.
Now after few days, if Reliance spot price is Rs.2100
Case1: When Reliance Share Price Increases within few days at 2100 price
So, now Profit in spot price holding will be (2100-2000) * 250 which is Rs. 25000
Loss in Put Option will be (35*250) which is Rs. 8750
Hence, calculating Net Profit will be (25000-8750) which is Rs. 16250
Case2: When Reliance Share Price Decreases within few days to 1900 price
So, now Loss in spot price holding will be (2000-1900) * 250 which is Rs. 25000
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Profit in Put Option will be (70*250) which is Rs. 17500
Hence, calculating Net Loss will be (25000-17500) which is Rs. 7500
So in these two cases we have observed that if the stock price increases from your price, you are
in profit and the hedge that you take for your position is in loss and hence your spot price will be
in profit.
Now the second cases where, the stock price falls below your price. So in this case you are
making loss in your transaction. But, in order to hedge your position you had taken a Put Option
for insuring your loss in the transaction. Hence your net loss got reduced to more than 70%
which is quite appreciable. As the main motive of Hedging is to reduce your losses on the stocks
that you hold in your Portfolio.
Advantages [7] of Hedging:
 Empowers traders to endure hard market periods
 In supporting utilizing alternative gives dealers an occasion to rehearse complex choices

exchanging systems to amplify return
 It additionally helps in saving time as the drawn out broker isn't needed to screen/change
his portfolio with every day market instability
 It limits misfortunes by and large
3.2 Basic Options Terms

Options arose as a monetary instrument, which limited the misfortunes with an arrangement of
limitless benefits on purchase or sell of fundamental resource. An Option is an agreement that
gives the right, yet not a commitment, to purchase or sell the basic resource at the very latest an
expressed date/day, at an expressed cost, at a cost. The gathering taking a long position for
example purchasing the alternative is called buyer of the choice and the gathering taking a short
position for example selling the alternative is known as the seller of the choice.
Options might be sorted into two principle types: ‐
- Call Options - Put Options
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Option, which gives purchaser an option to purchase the fundamental resource, is called Call
Option. Option which gives purchaser an option to sell the basic resource, is called Put Option.
Fig 3.2.1- Illustration of Call Option Contract
Call Options [8] Contract is a purchaser of a call option has the option to purchase the basic
resource at a specific cost.
Fig 3.2.2- Illustration of Put Option Contract
Put Options [9] Contract is a purchaser of a put option has the option to sell the hidden resource
at a specific cost.
Option Premium, is the value which the choice purchaser pays to the choice merchant.
Lot size is the quantity of units of basic resource in an agreement.
Spot value, is the cost at which the fundamental resource exchanges the spot market.
Strike value, [10] Strike cost is the cost per share for which the fundamental security might be
bought or sold by the alternative holder.
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3.3 System Architecture
Fig 3.3- Proposed System Architecture Illustration
The system architecture is a three tier architecture i.e. first segment is of User, second segment is
of Data Rendering, third segment is of Option Data Engine. User is supposed to enter the
opening price of the spot with respect to the expiry of that options contract.
The created procedures are shortlisted dependent on viability furthermore, stable returns. At long
last, the shortlisted procedure is reenacted on late information for figuring result. In the event
that the result is reliably certain, at that point the methodology is considered effective. [11] This
suggested system is shown on the screen as yield, which helps the client in settling on better
choice. To do as such, it separates the crude information and inferred information of recent long
periods of alternative fragment and spot Nifty from the data set and utilized for the handling.
I saw that various procedures work best over the span of the month. To additionally improve the
precision of the suggested procedure, a month was isolated into 8 unique parts and system
turning out best for that specific time of the month is prescribed to the user.
It at that point analyzes the estimations of calls and puts of the equivalent strike cost and finds a
point where most extreme contrast is found. On that most extreme point, the strategy will be
defined that will be, shown to the user.
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3.4 Call Option Buyer Strategy
It bodes well to be a purchaser of a call choice when you anticipate that the basic cost should
increment. [12] In the event that the fundamental value stays level or goes down, at that point
the purchaser of the call option loses cash. The cash the purchaser of the call option would
lose is comparable to the exceptional (understanding charges) the purchaser pays to the seller
of the call option
Intrinsic Value (IV) of a call choice is a non negative number represented by
IV = Max [0, (spot cost – strike price)]
The maximum loss the purchaser of call choice encounters is to the degree of the premium
paid. The call choice purchaser can possibly make limitless profits given the spot value
moves higher than the strike cost. Despite the fact that the call option should make a profit
when the spot value moves over the strike value, the call choice purchaser first needs to
recover the premium he has paid.
Where the call option buyer totally recuperates the premium he has paid is known as the
breakeven point. The call option buyer genuinely begins making a benefit just past the
breakeven point (which normally is over the strike cost). This strategy works when you think
the stock price can increase from the current levels; it means you have a Bullish View on that
particular stock. For a call option buyer a loss occurs when the spot price moves below the
strike price. However the loss to the call option buyer is restricted to the extent of the
premium he has paid.
Suppose you buy a Bharti Airtel 510 Call at Rs. 23 of January 28 Expiry Lot Size= 1851
Cost of Trade= 1851*23 = Rs. 42573
Now if you exit when the spot price of Bharti Airtel is trading at 510 Call is trading at 41
Call option got closed at Rs. 41 Premium = 1851*41= Rs. 75891
So Net Profit= 75891 – 42573 = Rs. 33318
If the Airtel stock price doesn’t increases then maximum loss will be capped at Rs. 42573.
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3.5 Call Option Seller Strategy
The option seller chooses to sell a call option. The main highlight note here is – the option seller is
selling a call option since he accepts that the cost of stock won't increment sooner rather than later.
Hence he accepts that, selling the call choice and gathering the premium is a decent methodology.
[13] At the point when you are bearish on a stock you can either sell the stock in the spot (although
on an intraday premise), short futures, or short a call option. The computation of the intrinsic value
for call option is standard; it doesn't change dependent on whether you are a option buyer or option
seller. You sell a call option just when you accept that upon expiry, the fundamental price won't
increment past the strike price. Selling a call choice is likewise called 'Shorting a call choice' or
essentially 'Short Call'
At the point when you sell a call option you get the premium amount. The profit of an option seller
is confined to the premium he gets; anyway his loss is conceivably limitless. The breakdown point
is where the call option seller surrenders the entire premium he has made, which implies he is
neither making profit nor loss. The call option buyer and the seller have an evenly inverse P&L
conduct
Breakdown point for calculating the probability of taking profits is given by
Breakdown point = Strike Price + Premium Received
For a call option seller a loss occurs when the spot price moves above the strike price. However the
loss to the call option seller is unlimited
Suppose you sell a Eicher Motors 2700 Call at Rs. 92 of January 28 Expiry Lot Size= 350
Now if you exit when the spot price of Eicher Motors is trading at 2700 Call is trading at 61
So Net Profit= (92 - 61)*350 = Rs. 10850
If the Eicher Motors stock price doesn’t decreases then maximum loss will be capped to
unlimited
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As you can see the risk of using this strategy is highly dangerous as your profit amount is
capped at certain extent, but loss is unlimited if the trade fails. This strategy works when you
think the stock price can decrease from the current levels; it means you have a Bearish View
on that particular stock.
3.6 Put Option Buyer Strategy
A put option buyer purchases the option to offer the hidden to the put option seller at a Strike cost.
This implies the put option seller, upon expiry should purchase if the 'put choice buyer' is selling
him. The objective behind purchasing a put option is to profit by a falling cost. As should be
obvious, the benefit increments as and when the value diminishes in the spot market. [14]
Buyers of Put Options are beneficial as and when the spot cost goes beneath the strike cost. At the
end of the day, purchase a put option just when you are bearish about the hidden share price.
Further, we need to comprehend the breakeven point count for a Put Option purchaser, the equation
to compute the equivalent is,
Breakeven point = Strike Price – Premium Paid
The Put option buyer encountered a loss just when the spot cost goes over the strike cost.
Nonetheless, this loss is restricted to the degree of the premium paid. The Put Option purchaser
will encounter an outstanding profit as and when the spot cost exchanges beneath the strike cost,
these gains can be possibly limitless.
Purchase a Put Option when you are bearish about the possibilities of the basic spot price. All in all,
a Put choice buyer is productive just when the hidden price decreases in worth. The intrinsic value
calculation of a Put option is,
IV (Put Option) = Strike Price – Spot Price
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Suppose you buy a PNB Bank 35 Put at Rs. 1.60 of January 28 Expiry Lot Size= 16000
Cost of Trade= 16000*1.60 = Rs. 25600
Now if you exit when the spot price of PNB Bank is trading at 35 Put is trading at 3.00
Put option got closed at Rs. 3.00 Premium = 16000*3 = Rs. 48000
So Net Profit= 48000 – 25600 = Rs. 22400
If the PNB Bank stock price doesn’t increases then maximum loss will be capped at Rs.
25600 which is still favorable as risk to reward ratio is still at approximately 1:1
3.7 Put Option Seller Strategy
In the event that the Put option buyer is bearish about the market, at that point plainly the put option
seller should have a bullish view on the business sectors. The choice to either purchase a consider
choice or sell a put choice truly relies upon how appealing the premium are. At the hour of taking
the choice, in the event that the call option has a low premium, at that point purchasing a call option
bodes well, similarly in the event that the put option is exchanging at a high excellent, at that point
selling the put choice (and consequently gathering the superior) bodes well. Obviously to sort out
what precisely to do (purchasing a call option or selling a put option) relies upon the engaging
quality of the premium, and to judge how appealing the premium is you need some foundation
information on 'option pricing'.
Do Note – when you sell option (paying little mind to Calls or Puts) margins are impeded in your
ledger. The target behind selling a put option is to gather the expenses and advantage from the
bullish attitude toward market. Hence as should be obvious, the benefit remains level (premium
gathered) as long as the spot value stays over the strike cost.
[15] Sellers of the Put Options are productive as long as long as the spot value stays at or higher
than the strike cost. As such sell a put option just when you are bullish about the fundamental or
when you accept that the basic will at this point don't keep on falling. A put option seller can
25
conceivably encounter a limitless loss as and when the spot cost goes lower than the strike cost.
Further, the breakdown point for a Put Option seller can be characterized as a point where the Put
Option seller begins making a loss subsequent to parting with the entire premium he has gathered,
Breakdown point = Strike Price – Premium Received
The loss is hypothetically limitless (hence the danger) but the profits are confined to the degree of
premium received. You sell a Put option when you are bullish on a stock or when you accept the
stock cost will not, at this point go down. At the point when you are bullish on the stock price you
can either purchase the consider option or sell a put choice. The choice relies upon how alluring the
premium is.
Suppose you sell a SAIL 75 Put at Rs. 4 of January 28 Expiry Lot Size= 19000
Now if you exit when the spot price of Eicher Motors is trading at 75 Put is trading at 2
So Net Profit= (4 - 2)*19000 = Rs. 38000
If the SAIL stock price doesn’t increases then maximum loss will be capped to unlimited
As you can see the risk of using this strategy is highly dangerous as your profit amount is capped
at certain extent, but loss is unlimited if the trade fails. This strategy works when you think the
stock price can increase from the current levels; it means you have a Bullish View on that
particular stock.
3.8 Bull Call Spread Strategy
A bull call spread procedure is worked by going long accessible if the need arises choice and all the
while selling a higher strike call alternative.
The point of this technique is to profit by little sure developments in the stock/index. Accordingly,
this procedure is appropriate when your standpoint is modestly bullish on the basic security. The
bull call spread system includes choices on a similar fundamental security, with a similar
termination date, however with various strike costs. Accordingly, this technique is otherwise called
a "Vertical Spread". We purchase 1 OTM Strike Call and Sell 1 OTM Strike Call.
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This strategy is quite popular amongst novice traders since it is simple to follow and has
limited risk involved but if you click the right opportunity there is great potential to get good
amount of returns on your investment.
The spread strategies are some of the simplest option strategies that a trader can implement.
Spreads are multi leg strategies involving 2 or more options. When I say multi leg strategies, it
implies the strategy requires 2 or more option transactions.
Spread strategy such as the ‘Bull Call Spread’ is best implemented when your outlook on the
stock/index is ‘moderate’ and not really ‘aggressive’. For example the outlook on a particular stock
could be ‘moderately bullish’ or ‘moderately bearish’.
The bull call spread is a two leg spread strategy traditionally involving ATM and OTM options.
However you can create the bull call spread using other strikes as well.
To implement the bull call spread –
 Buy 1 ATM call option (leg 1)
 Sell 1 OTM call option (leg 2)
When you do this ensure – All strikes belong to the same underlying; Belong to the same expiry
series; Each leg involves the same number of options
A moderate move would mean you expect a movement in the stock/index but the outlook is not too
aggressive. One has to quantify ‘moderate’ by evaluating the volatility of the stock/index. Bull Call
spread is a basic spread that you can set up when the outlook is moderately bullish. Classic bull call
spread involves buying ATM option and selling OTM option – all belonging to same expiry, same
underlying, and equal quantity. The theta plays an important role in strike selection. The risk
reward gets skewed based on the strikes you choose
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3.9 Option Strategy Defined by Hybrid Combination 1
I created this strategy by selling 1 Put option, selling 1 Call option and buying 1 Call option. Max.
Profit expected while fundamental option lapses between the sold put and sold call of the spread.
Loss: If credit is lesser than the width of the Call spread, and there is upwards move in that
particular underlying security. This technique that we have made is used when the market remains
range bound custom option system which is explicit in nature. This system is most advantageous
while basic option stays or floats towards the strike that we have selected in the system.
It is a slightly bullish strategy that combines a short put and a short call spread. The strategy is
created to have no upside risk, which is done by collecting a total credit greater than the width of
the short call spread.
It is traded when a trader has a neutral to bullish assumption on a stock, but not extremely bullish
since the position incorporates a short call spread. The trade is suitable for stocks that have sold off
and have high implied volatility rank (IVR). This allows for more premium to be collected, while
having no upside risk if the underlying trades through the short call spread. For traders who are
very bullish on a stock that has sold off and has a high IVR, strategies such as short puts or covered
calls may be more suitable.
When do we close this strategy?

The trade is closed for a winner by purchasing the options back for a net debit that is less than the
credit collected at order entry. The first profit target is 50% of max profit, or half of the credit that
was initially received at order entry.
When do we manage this strategy?

If the stock trades through the short call spread, the short put can be rolled up to collect more credit.
However, since there is no upside risk when trading, this adjustment isn’t entirely necessary. If the
stock sells off and tests the short put, the short call spread can be rolled down to collect more credit
without increasing the upside risk. In the worst case scenario, a trader can close the entire position
for a loss if the loss on the short put becomes too large
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3.10 Bear Put Spread Strategy
A bear put spread strategy is built by going long on put option and simultaneously selling a lower
strike put option. The aim of this strategy is to benefit from small negative movements in the stock.
the Bear Put Spread is quite easy to implement. One would implement a bear put spread when the
market outlook is moderately bearish, i.e you expect the market to go down in the near term while
at the same time you don’t expect it to go down much. If I were to quantify ‘moderately bearish’, a
4-5% correction would be apt. By invoking a bear put spread one would make a modest gain if the
markets correct (go down) as expected but on the other hand if the markets were to go up, the trader
will end up with a limited loss.
A conservative trader (risk adverse trader) would implement Bear Put Spread strategy by
simultaneously –
 Buying an In the money Put option
 Selling an Out of the Money Put option
There is no compulsion that the Bear Put Spread has to be created with an ITM and OTM option.
The Bear Put spread can be created employing any two put options. The choice of strike depends
on the aggressiveness of the trade. Spread offers visibility on risk but at the same time shrinks the
reward
When you create a spread, the proceeds from the sale of an option offset the purchase of an option.
Bear put spread is best invoked when you are moderately bearish on the markets. Both the profits
and losses are capped. Classic bear put spread involves simultaneously purchasing ITM put options
and selling OTM put options. Bear put spread usually results in a net debit. Select strikes based on
the time to expiry. Implement the strategy only when you expect the volatility to increase
(especially in the 2nd half of the series)
Net Debit = Premium Paid – Premium Received
Breakeven = Higher strike – Net Debit
Max profit = Spread – Net Debit
Max Loss = Net Debit
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3.11 Protective Put Strategy
A protective put is an options strategy that is designed to help you limit your losses in the event of
adverse and unexpected market movements. This options strategy requires you to buy put options
contracts of the stock you currently own. This way, you can limit or sometimes even negate the
losses that you might incur when the price of the stock you own goes down.
Since the movement of the stock market can be quite unpredictable at times, you might want to
hedge against the possibility of downsides in the price of the stock that you are bullish on. This is
where the strategy comes into play. The protective put strategy should be used only when you are
long on a stock.
Scenario 1: The price of the stock goes up
In this scenario, your long position on the stock starts to generate gains for you. On the other hand,
the put option contract that you bought to hedge yourself against risk starts to decline in value.
Since you’ve bought a put option, the maximum loss that you get to suffer is just the premium that
you paid to buy the option. The net amount that you receive after subtracting the put option
premium from the gains of the long position would ultimately be your profit.
Scenario 2: The price of the stock falls
In this scenario, your long position on the stock starts to decline in value. Conversely, the value of
your put option starts to rise dramatically. Since you’ve bought a put option, there’s absolutely no
cap on the amount of gains that you get to enjoy; it is virtually unlimited. Now, the gains from the
put option would effectively set off the losses that you experience from the declining long position.
Sometimes, you might even end up with a profit too.
The protective put option strategy is a really good way to protect you from uncertainties and market
downsides. That said, here’s a point to note. In order for the protective put strategy to work
accurately, it is best if you buy the put option around the same time as you buy the stock. This
would help keep the differences in pricing to a minimum.
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3.12 Covered Call Strategy
The covered call strategy essentially involves an investor selling a call option contract of the stock
that he currently owns. By selling a call option, the investor essentially locks in the price of the
asset, thereby enabling him to enjoy a short-term profit. Apart from this, the investor also gets a
slight protection from any future declines in stock prices.
The covered call is ideal for neutral and moderately bullish situations, where the future upside
potential of the stock that you own is limited. This strategy is ideal when the outlook for the stock
that you own is not very bright and when booking short-term profits would be a better idea than to
keep holding the stock.
For utilizing a covered call option strategy, you’re required to first own the stock of a company. So,
let’s assume that you already hold the stock of a company i.e. going long. Your view when you
bought the stock was bullish, but as time passed, you’re now unsure of the future upside potential
for the stock and so you don’t expect the price to raise much.
Under such a situation, what do you do? You can book a short-term profit and protect yourself
from minor downsides in the price of the stock by using the call option contract of the stock. And
so, you sell a call option contract of the stock at a strike price that’s higher than the purchase price
of the stock. The buyer of the call option would in turn give you a premium, which you’re
obligated to keep whether the option is exercised or not.
Scenario 1: The price of the stock rises
In such a situation, since you’ve effectively locked in the sale price of the stock by selling a call
option, you get to enjoy a guaranteed short-term profit. In addition to this, you also get to pocket
the premium that the buyer of the call option paid you. Therefore, it is a win-win situation.
Scenario 2: The price of the stock falls
In this scenario, you get limited protection from the downside thanks to the premium that you were
able to pocket by selling the call option. This premium amount that you received can be used to
31
reduce the impact of the loss that you had to suffer as a result of the fall in the stock price.
Scenario 3: The price of the stock remains the same
When the price of the stock remains neutral without any changes whatsoever, your profit would
actually be the amount of premium that you were able to pocket by selling the call option contract
of the stock. This is the case irrespective of whether the option is exercised by the buyer or not.
Sometimes, the buyer might not want to exercise the option, in which case you get to enjoy the
premium as well as hold onto your shares.
One of the advantages of the covered call is the fact that you don’t have to time the purchase of
your stock and the sale of the call option contract. You can sell the call option anytime after you’ve
purchased the stock.
This strategy is similar to Covered Call but involves another position of buying a Put Option to
cover the fall in the price of the underlying stock. It involves buying an OTM Put Option & selling
an OTM Call Option of the underlying asset. It is a low risk strategy since the Put Option
minimizes the downside risk. However, the rewards are also limited and are perfect for
conservatively bullish market view.
The Option Strategy Defined by Hybrid Combination 2 is perfect if you're Bullish for the
underlying stock you're holding but are concerned with risk and want to protect your losses.
You will incur maximum losses when price of the underlying is less than the strike price of the Put
Option.
Max Loss = Purchase Price of Underlying - Strike Price of Long Put - Net Premium Received
You will incur maximum profit when price of underlying is greater than the strike price of call
option.
Max Profit = Strike Price of Short Call - Purchase Price of Underlying + Net Premium Received
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The advantage of using this strategy is that one is aware of the losses and gains to be expected from
the beginning. With time, the value of the options which were bought and sold, both decreased.
Returns might be less and slow due to selling the call, but the option heading down assures
protection.
Components of Option Trading Strategy Defined by Hybrid Combination 2 :
 Buy 1 OTM Put option - lower limit - for protection
 Sell 1 OTM Call option - upper limit
This Strategy can have a widespread usage. Conservative Investors can find it to be a good
trade-off to limit profits in return for limited losses and Portfolio managers can use it to
protect their position in the market, while some investors can practice it as it reduces the price
of the protective put.
This strategy allows an investor to benefit from significant moves in a stock's price, whether the
stock moves up or down. This approach consists of buying an equal number of call and put
options with the same expiration date. The difference is that the one leg has two different strike
prices, while the other leg has a common strike price.
These options strategies gives investors use to benefit from significant moves in a stock's price,
regardless of the direction. They are useful when it's unclear what direction the stock price might
move in, so that way the investor is protected, regardless of the outcome. This strategy is useful
when the investor thinks it's likely that the stock will move one way or the other but wants to be
protected just in case. Retail Investors should learn the complex tax laws around how to account for
options trading gains and losses.
This trading strategy is one way for a trader to profit on the price movement of an underlying asset.
Let's say a company is scheduled to release its latest earnings results in two weeks' time, but you
have no idea whether the news will be good or bad. These weeks before the news release would be
a good time to enter into a trade because when the results are released, the stock is likely to move
sharply higher or lower.
33
While this trade has no directional bias, it is used when the investor believes the stock has a better
chance of moving in a certain direction, but would still like to be protected in the case of a negative
move.
Traders new to options strategies typically begin with the basic call and put strategies—selling
covered calls for potential income and buying puts for temporary downside protection. Although
many traders never venture beyond the basics, some look at the versatility and flexibility of
advanced options strategies and move to strategies that can help them with pinpointed objectives.
When traders first consider moving into more advanced strategies, the first thing they think of is
greater risk potential. That’s important, but also considers that advanced strategies are more
complex, so understanding what your trades will be doing under different conditions becomes even
more important.
Some traders who play events from the short side choose to limit risk to the upside and downside
by using this Option Strategy Defined by Hybrid Combination 3 that’s further OTM than the
strikes in a conservative way.
There’s no right or wrong way to play single events such as earnings reports. A lot depends on your
market views, your objectives, and your risk tolerance. Option Strategy Defined by Hybrid
Combination 3 can be an effective way to trade volatility, but make sure you know and are
comfortable with the risks involved.
Components of Option Trading Strategy Defined by Hybrid Combination 3:
 Out of the money Put Option
 Out of the money Call Option
 In The Money Call Option
 In The Money Put Option
From the above strategy, it is observed that the max profit is unlimited and the max loss is
limited to the net premium paid for purchasing the options contract. Thus, this strategy is
suitable when your outlook is moderately bearish on the stock. On the other hand , there is no
limit for the profit that you can gain once the stock price moves significantly in any direction.
34
Chapter 4
Implementation
This chapter presents the tools and libraries used in building the system; and also go
through the execution which shows the step-by-step process that a user of the system will go
through and how they can make the most of the system. This chapter also includes in-depth
analysis carried out during this implementation.
4.1 Role of Python in Options Trading

Python has become one among the foremost popular programming languages for many
Companies. [16] Its simplicity and robust modeling capabilities make it a superb tool for
researchers, analysts, and traders. Python continues to stay one among the foremost demanded
programming languages within the stock exchange industry. Python is straightforward to write
down and deploy, making it an ideal candidate for handling financial services applications that
the majority of the time are incredibly complex. At an equivalent time, it reduces the potential
error rate which is critical when developing products for a heavily-regulated industry like
finance.
Languages like Matlab or R are less widespread among economists who most frequently use
Python to form their calculations. That’s why Python rules the finance scene with its simplicity
and practicality in creating algorithms and formulas – it's just much easier to integrate the work
of economists into Python-based platforms. Tools like scipy, numpy or matplotlib allow one to
perform sophisticated calculations and display the leads to a really approachable manner. With
Python, developers don't need to build their tools from scratch, saving tons of your time and
money on development projects. Python is widely utilized in quantitative finance - solutions that
process and analyze large datasets, big financial data. Libraries like Pandas simplify the method
of knowledge visualization and permit completing sophisticated statistical calculations.
Building a trading strategy with Python is now possible, Stock markets generate massive
amounts of knowledge that need tons of study and that is where Python helps also. Developers
can use it to make solutions that identify the simplest trading strategies and offer actionable,
predictive analytical insights into the condition of specific markets. Again, stock markets require
a lot of analysis and Python can handle it better than others. With the help of this language,
35
developers can define the winning trading strategies and get useful tips related to the future
conditions of one or another market. To create the software with such capabilities can be used
not only Python but Django framework based on Python.
4.2 Usage of Different Python Libraries
 Pandas-Datareader: The Pandas datareader [21] is a sub package that allows one to create a
dataframe from various internet data sources, currently including: Yahoo Finance, Google
Finance. Data readers extracted from the pandas codebase, should be compatible with recent
pandas version.
 NumPy: NumPy, which stands for Numerical Python, is a library consisting of
multidimensional array objects and a collection of routines for processing those arrays. Using
NumPy, mathematical and logical operations on arrays can be performed. NumPy is the
fundamental package for scientific computing with Python. In Python, data is almost
universally represented as NumPy arrays. Even newer tools like Pandas are built around
the NumPy array.
 Matplotlib.pyplot: It may be a collection of command style functions that make matplotlib
work like MATLAB. Each pyplot function makes some change to a figure e.g., creates a
figure, creates a plotting area during a figure, plots some lines during a plotting area, decorates
the plot with labels, etc.[19] In Matplotlib.pyplot various states are preserved across function
calls, in order that it keeps track of things just like the current figure and plotting area, and
therefore the plotting functions are directed to the present axes [20].
 iPython: It is an alternative Python interpreter that provides improvements over the default
Python interpreter. These improvements include syntax highlight, proper indentation,
documentation, and much more. With iPython, you can also use Jupyter notebooks to create
reports that contain live code, charts, and more. If you’re working on a project using Python
for financial data analysis, IPython is a phenomenal tool to use.
 Statistics: It is a python 2 and port of 3.4 statistical modules. This module provides functions
for calculating mathematical statistics of numeric data. The module is not intended to be a
36
competitor to third-party libraries such as NumPy, SciPy, or proprietary full-featured statistics
packages aimed at professional statisticians such as Minitab, SAS and Matlab. It is aimed at
the level of graphing and scientific calculators.
 Datetime: DateTime objects represent instants in time and provide interfaces for controlling its
representation without affecting the absolute value of the object. DateTime objects may be
created from a wide variety of string or numeric data, or may be computed from other
DateTime objects. Datetime support the ability to convert their representations to many major
timezones, as well as the ability to create a DateTime object in the context of a given
timezone.
 yfinance: A python module that returns stock, cryptocurrency, forex, mutual fund, commodity
futures, ETF, and US Treasury financial data from Yahoo Finance. [17] The financial data
from all methods is returned as JSON. You can run multiple symbols at once using an inputted
array or run an individual symbol using an inputted string. Yahoo Financials works with
Python 2.7, 3.3, 3.4, 3.5, 3.6, and 3.7 and runs on all operating systems. (Windows, Mac,
Linux) [18].
 get-all-tickers: It gets a python list or downloads all publicly traded tickers.
 fix_yahoo_finance: It is yahoo finance market data downloader and also fixes for pandas
datareader’s. This library was renamed to yfinance. For reasons of backward-compatibility,
this library is importing and using yfinance- but you should install and use yfinance directly.
4.3 Matplotlib
A picture is worth thousand words, and with Python’s matplotlib library, it fortunately takes far but
thousand words of code to make a production-quality graphic.
To make necessary statistical inferences, [20]it becomes necessary to visualize the data and
Matplotlib is one such solution for the python users. It is a very powerful plotting library useful for
those working with python and numpy. The most used module of matplotlib us Pyplot which
provides an excellent interface.
However, [22] matplotlib is additionally a huge library, and getting a plot to seem good is usually
achieved through trial and error. Using one-liners to get basic plots in matplotlib is fairly simple,
but skillfully commanding the remaining 98% of the library are often daunting. A Figure object is
37
the outermost container for a matplotlib graphic, which can contain multiple Axes objects. One
source of confusion is the name: an Axes actually translates into what we think of as an individual
plot or graph
4.4 Implementation Plan
Fig: 4.1 – Implementation Chart For Dissertation
38
4.5 Execution Of Functions
In the below piece of code, have defined functions to obtain the historical stock data.
The function “plt.show” takes in the price changes and outputs a Line Chart.
In the below piece of code, have defined functions to obtain the Call Option Buyer Payoff
39
In the below piece of code, have defined functions to obtain the Call Option Seller Payoff
In the below piece of code, have defined functions to obtain the Put Option Buyer Payoff
40
In the below piece of code, have defined functions to obtain the Put Option Seller Payoff
4.6 Results
Once the execution of function is done, the different strategies are ready for execution and the
following results are generated after applying the above filters, this is a list of different technical
strategies:
Fig 4.2- Nifty Line Chart:-This picture depicts the Nifty Line Chart plotted by the system, it plots
the closing price
41
Fig 4.3 - Call Option Buyer Strategy:- This picture depicts the plotting of Call Option Buyer with
the help of Cipla Stock plotted with Profits and Loss for this strategy
Fig 4.4 -Call Option Seller Strategy:-This picture depicts about the plotting of Call Option Seller
with the help of MRF Ltd Stock plotted with Profits and Loss for this strategy
42
Fig 4.5 - Put Option Buyer Strategy:-This picture depicts about the plotting of Put Option Buyer
with the help of Infosys Stock plotted with Profits and Loss for this strategy
Fig 4.6 - Put Option Seller Strategy:-This picture depicts about the plotting of Put Option Buyer
with the help of Wipro Stock plotted with Profits and Loss for this strategy
43
Fig 4.7 - Nifty 50 Tailing All the Data from 1/1/2007 – 4/1/2021
Fig 4.8 – Bull Call Spread Strategy:-This picture depicts about the plotting of Bull Call Spread with
44
the help of Nifty plotted with Profits and Loss for this strategy
Fig 4.9 – Option Strategy Defined by Hybrid Combination 1:-This picture depicts about the
plotting of hybrid strategy with the help of TCS plotted with Profits and Loss for this strategy
45
Fig 4.10 – Bear Put Spread Strategy:-This picture depicts about the plotting of bear put spread with
the help of Bharti Airtel plotted with Profits and Loss for this strategy
Fig 4.11 – Protective Put Strategy:-This picture depicts about the plotting of protective put with the
help of Auro Pharma plotted with Profits and Loss for this strategy
46
Fig 4.12 – Covered Call Strategy:-This picture depicts about the plotting of covered call with the
help of Divis Lab plotted with Profits and Loss for this strategy
47
plotting of hybrid combination 2 with the help of Idea plotted with Profits and Loss for this strategy
48
plotting of hybrid combination 3 with the help of Reliance Industries plotted with Profits and Loss
for this strategy
49
100
91.64
89.51
90 84.71
80.22
78.06
80 75.42
69.55
70 64
60.45 61.82
58 59
60 55 55
51
47
50
42
39
40
33
31
29
27
30
20
10 11
8 8 9
7 6 6
10 5 4
3
Approximate Time Taken To Perform Manually(In Minutes)

Execution Time Taken By Python (In Seconds)
Profit Rate (In Percentage)
Fig 4.15 –Comparative Analysis of Option Strategies
50
The testing process:
 Included and done testing on various option models
 Had 11 strategies created for the process in the current trading scenario
 In general during the entire testing process multiple such scenarios were used and thus the total
strategies research count goes increases, as well many more trades were used for option
testing.
Fig 4.16 –Sample Snippet of HDFC BANK Future data being imported by the system with the help
of NSE-py
Fig 4.17 –Sample Snippet of HDFC BANK 1500 CE Strike Option data being imported by the
system with the help of NSE-py
51
Fig 4.18 –Sample Snippet of HDFC BANK 1500 CE Strike Option data being plotted by the
system with the help of NSE-py
The following discussion is in line with the gaps identified after studying the literature survey and
fulfilling them as a part of this project:
 Authentication can be made from NSE Option Prices
 Global Verifiability
 Flexibility of Use
 Retail Investors will be benefited by using these strategies
 Robust Architecture
 Hedging your trades saves from uncertain losses
 Python codes can be directly linked to your trading account
52
Chapter 5
Conclusion And Scope For Future Work
This chapter adds a concluding note to the work done in the project so far and sums up the
results of the project in accordance to the objectives and scope laid down. It also mentions
about the future scope of this project, which can enthusiast the readers for further
motivation.
5.1 Conclusion
 Option Trading Strategies are a major player across the stock market and will continue to
dominate markets to replace human intensive tasks.
 Implementation of various strategies with the help of Python works well when the tasks
are repetitive, frequent, human labor intense and can be expressed in crisp, unambiguous
steps.
 This is proven by taking real world Eleven Options Trading Strategies and implementing
the technology using iPython.
 The results in Chapter 4 are an indicator of the excellent gain the technology provides in
terms of time saving and Profit rate thereby reducing the number of Losses incurred in
trading.
 The Option Combination Hybrid Strategy 3 performs the best out of eleven strategies that
I have analyzed so far.
 In this research work, I have developed the strategies, which are giving hedged positions
and minimizing the risks. So in this manner, I have removed the component of
speculation.
 By using this research work, one can gain maximum exposure to the Option Segment and
minimize the speculation risk.
 The strategy plotted by the system gave an average ROI of 11%, which is considered
quite good and also there was minimum risk taken while plotting.
 Once these strategies are tested rigorously for a longer duration, then these strategies can
53
be further expanded for Currency Options Contract, Cryptocurrency Options Contract. So
in this way these strategies can be enhanced further to take open interest, market
volatility, sentiments, and global market indices into considerations.
5.2 Scope For Future Work
 Hedging Using Options is a technology that offers a lot of promise in many applications that we
use frequently these days.
 As a starting point the any reader of this thesis who may want to work on this technology could
narrow down their search for a topic to one domain and try to identify the problems that persist.
 There are a lot of applications in many other domains; however, narrowing down to a single
domain could help identify the problems more clearly, in this case – which is – Advancement in
Options Strategy.
 The primary aim of this thesis is to understand the workings of Hedging System and its
implementation in eight different strategies.
 Having said that, one could look at expanding this application to the other strategies– which in
itself could contain its own challenges from a development standpoint more so.
 One can connect your python code with any broker like Ami-Broker, where we can code our
strategies and implement it in live markets.
 We can also connect the live option prices, to the system and get live data from the NSE.
54
Chapter 6
Publications of the Candidate
This chapter adds a list of publication done in the project so far. It also mentions about the
journal in which the publications have completed and can enthusiast the readers for
author’s hard work.
1. Gananjay Sandeep Thanekar; Zaheed Shamsuddin Shaikh, “Hedging The Portfolio Using
Options Strategies”, 2021 7th International Conference on Advanced Computing and
Communication Systems (ICACCS), 19-20 March 2021
2. Gananjay Sandeep Thanekar , Zaheed Shamsuddin Shaikh, 2021, Analysis and Evaluation
of Technical Indicators for Prediction of Stock Market, International Journal Of Engineering
Research & Technology (IJERT) Volume 10, Issue 04 (April 2021)
55
References
[1] A Novel Approach of Option Portfolio Construction Using the Kelly Criterion by Mu-En
Wu; Wei-Ho Chung IEEE Access 17 September 2018
[2] Hedging option contracts with locally weighted regression, functional data analysis, and
Markov chain Monte Carlo techniques by Jae-Yun Jun; Yves Rakotondratsimba 19-21 Feb.
2020 International Conference on Artificial Intelligence in Information and Communication
(ICAIIC)
[3] Simulation of Volatility Trading using Nikkei Stock Index Option based on Stock Bulletin
Board by Kodai Sasaki; Yui Hirose; Eiichi Umehara; Hirohiko Suwa; Yuki Ogawa; Tatsuo
Yamashita; Kota Tsubouchi 10-13 Dec. 2018 IEEE International Conference on Big Data (Big
Data)
[4] Forecasting Option Price by GARCH Model by Navaches Jiratumpradub; Walailuck
Chavanasporn 5-6 Oct. 2016 8th International Conference on Information Technology and
Electrical Engineering (ICITEE)
[5] Dr. D Maruti Rao Developing, “Option Strategies by Using Technical Analysis: A Case
Study Of Automobile Sector”, IJMFSMR Journal Vol.1 No. 6 Section 1, Pg No. 94, June, ISSN
2277 3622
[6] Put Currency Option Pricing under Uncertain Environments by Xiao Wang; Yufu Ning 29-31
July 2017 13th International Conference on Natural Computation, Fuzzy Systems and
Knowledge Discovery (ICNC-FSKD)
[7] A Framework of Option Buy-Side Strategy with Simple Index Futures Trading Based on
Kelly Criterion by Mu-En Wu; Pang-Jen Hung 12-14 Nov. 2018 5th International Conference on
Behavioral, Economic, and Socio-Cultural Computing (BESC)
[8] “Call Option Meaning” Available at https://www.investopedia.com/terms/c/calloption.asp
[9] “Put Option Meaning” Available at https://www.investopedia.com/terms/p/putoption.asp
[10] “Strike Price Meaning” Available at https://www.investopedia.com/terms/s/strikeprice.asp
[11] “What is Option Data Engine?” Available at https://devexperts.com/options-pricing-engine/
[12] “Call Option Buyer Summary” Available at https://commodity.com/technical-
analysis/options/call/
[13] “Call Option Seller Methodology” Available at https://www.angelbroking.com/blog/10-
56
points-to-remember-when-selling-options
[14] “How is Put Option Buyer?” Available at https://www.bankrate.com/investing/what-are-
put-options-learn-basics-buying-selling/
[15] “Put Option Seller Demystified” Available at https://ragingbull.com/options/sell-put-
option/#:~:text=When%20an%20investor%20sells%20a,it%20for%20the%20lower%20price.
[16] “Why Python Is Used For Developing Automated Trading Strategy?” Available at
https://www.geeksforgeeks.org/getting-started-with-python-for-automated-trading/
[17] “How To Use the Yahoo Finance API in 2020” Available at
[18] “Yahoo Finance” Available at https://in.finance.yahoo.com/
[19] “Matplotlib Tutorials” Available at https://www.w3schools.com/python/matplotlib_intro.asp
[20] “How to Plot a Line Chart in Python using Matplotlib” Available at https://datatofish.com/line-
chart-python-matplotlib/
[21] “Pandas Datareader” Available at https://pandas-datareader.readthedocs.io/en/latest/
[22] “Graph Plotting in Python” Available at https://opensource.com/article/20/4/plot-data-python
[23] “NSE curriculum based NCFM modules (National Certificate in Financial Markets), Derivatives
Market Dealers Module (DMDM), Options Trading Strategies Module 3, Section 5”
[24] “What is Hedging?” Available at https://www.thebalance.com/hedge-what-it-is-how-it-works-
with-examples-3305933
[25] “Using Options as a Hedging Strategy” Available at https://www.motilaloswal.com/blog-
details/How-to-hedge-your-risk-using-options-positions/1641
[26] “Advantages of Hedging in Finance” Available at https://www.fool.com/knowledge-
center/advantages-and-disadvantages-of-hedging-in-finance.aspx
57
Acknowledgement
No project is ever complete without the guidance of those expert who have already traded this past
before and hence become master of it and as a result, our leader. So I would like to take this
opportunity to take all those individuals who have helped me in visualizing this project.
Firstly, I would like to thank my Parents without whom; this project could not be completed at all.
I would like to express special thanks of gratitude to my Guide Prof. Zaheed Shaikh as well as our
Project Coordinator Dr. Bhakti Palkar who gave me the golden opportunity to do this wonderful
project on the topic of Hedging The Portfolio Using Option Strategies, which also helped me in doing
a lot of research and I came to know about so many new things.
I am very grateful to our Head of the Department Dr. Deepak Sharma for extending his help directly
and indirectly through various channels in my project work.
We are really thankful to all our Professors from K.J. Somaiya College of Engineering for their
valuable insights and tips during the designing of the project. Their contributions have been valuable
in so many ways that I find it difficult to acknowledge them individually.
Thanking You.
58
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Hedging The Portfolio Using Options Strategies

Technical Report · September 2021

Gananjay Thanekar Zaheed Shamsuddin Shaikh

SEE PROFILE SEE PROFILE

The user has requested enhancement of the downloaded file.

for the degree of

Gananjay Sandeep Thanekar

Prof. Zaheed Shaikh

Department of Computer Engineering

Batch 2019 - 2021

Guide Head of the Department

Certificate of Approval of Examiners

External Examiner / Expert Guide / Internal Examiner

Gananjay Sandeep Thanekar

List of the Figures...……………………………………………………………………….….iv

1.2 Problem Statement…………………………………………………………………1

1.5 Organization Of Report………………………………………………………...…..2

3 Hedging Strategies Using Options…………….………………………………………

3.1 What is Hedging? ………………...………………………………………...…….18

3.2 Basic Option Terms………..……………………………………………………...19

3.3 System Architecture..…………….……………………………...………………..21

3.4 Call Option Buyer Strategy…….……………..…………………………………..22

3.5 Call Option Seller Strategy..………………………………………………………23

3.6 Put Option Buyer Strategy….……………………………………………………..24

3.7 Put Option Seller Strategy……………………………………………………...…25

3.8 Bull Call Spread Strategy…………………………………………………………26

3.9 Option Strategy Defined by Hybrid combination 1……………………………….28

3.11 Protective Put Strategy……………….…………………..……………………….. 30

3.12 Covered Call Strategy…………………………… ………………………………. 31

3.13 Option Strategy Defined by Hybrid combination 2…………..……………………… 32

3.14 Option Strategy Defined by Hybrid combination 3……………………..……………. 33

4.1 Role Of Python In Options Trading……………………..……...………….…….35

4.2 Usage Of Different Python Libraries ……………………………………………..36

4.4 Implementation Plan…………………………………………………………...….38

4.5 Execution Of Functions…………………………………………………………...39

5 Conclusion And Scope For Future Work………………………………………......53

6 Publications of the Candidate…………...………………………………………......55

2.1 Returns Of Bull Spread…………………………………….…..………....................... 5

2.2 Black-Scholes Call Option Price……..……………………………………………….. 7

2.3 Number of Shares for Hedging vs. Horizon Time ………..…………………………. 9

2.4 Model Creation Process……………………….. ……..……………………………… 11

2.5 Training and Testing Data……………………………..………………..……………. 13

3.2.1 Illustration of Call Option Contract…………...……….………………...…………… 20

3.2.2 Illustration of Put Option Contract………………. ………………………………….. 20

3.3 Proposed System Architecture… ……………............................................................. 21

4.1 Implementation Gantt Chart For First Stage Dissertation…………………………… 38

4.3 Call Option Buyer Strategy…………………………….……….....…………………. 42

4.4 Call Option Seller Strategy…………………………………. …………………..….……….. 42

4.5 Put Option Buyer Strategy………………………………….……………………..……….. 43

4.6 Put Option Seller Strategy…………………………………………………………...………. 43

4.7 Nifty 50 Tailing All the Data from 01/01/2007-04/01/202………….……..………… 44

4.8 Bull Call Spread Strategy……………………………………….…..……………………. 44

4.9 Option Strategy Defined by Hybrid Combination 1…………………………………….……. 45

4.10 Bear Put Spread Strategy…………………………………………. ………………...……….. 46

4.12 Covered Call Strategy……………………………………………………………………..…. 47

2.2 Bull Spread generated by the system………………………………………………….. 4

2.3 Simulation Case……………………………………………………………………….. 12

1.2 Problem Statement

1.5 Organization of report

Table 2.2 - Bull Spread generated by the System

Fig 2.1- Returns of Bull Spread