"A STUDY OF OPTION STRATEGIES AND

USE OF DERIVATIVES"
AT
NARNOLIA SECURITIES LIMITED, RANCHI

PRESENTED BY:
VIKASH KUMAR SINHA
PGDM(BM)-FINANCE
2009 – 2011
ROLL NO.- 9258
INSTITUTE OF INTERNATIONAL BUSINESS & RESEARCH,PUNE
EXCUTIVE SUMMARY
I was assigned to do my summer project in Narnolia Securities Limited (sub-
broker Motilal Oswal ), Ranchi, on the Title “Study of Option Strategies and
Use of Derivatives”.
Narnolia Securities Limited is a reputed organization in the field of share trading.
The company keeps its vision and mission always very clear. It works with the
noble purpose of understanding the people’s needs of securing their investment
stable and risk free. The company always believes in complementing its objective
and motto with hard work and dedication. The Management team always works
in synchronization with the people’s needs and always takes the active consult of
the company’s development. It has always proven its excellence at providing
quality services to its customers at every single opportunity they have in their
sight.
The purpose of the study is to study the various option strategies which is used in
the derivative market. In finance an option strategy is the purchase and/or sale of
one or various option positions and possibly an underlying  position. There are
total 20 strategies which I studied during my project.
I can only say that this project report will be very helpful for the company as well
as me, in understanding and fulfilling the customer’s needs and to attain the
company’s goals and objectives.
OBJECTIVE OF STUDY

 To study Indian Derivative Market.

 To study different strategies used in Future and

Options.

 To suggest the various Option Strategies by

considering risk appetite and future market
expectations.
 LIMITATIONS
 Lack of awareness about Futures and Options segment:
Since the area is not known before it takes lot of time in
convincing people to start investing in Futures and Options
market for hedging purpose.
 Mostly people comfortable with traditional brokers:
-- As people are doing trading from there respective brokers,
they are quite comfortable to trade via phone.
 Some respondents are unwilling to talk: - Some
respondents either do not have time or willing does not
respond as they are quite annoyed with the adverse market
conditions they faced so far.
 Misleading concepts: - Some people think that Derivatives
are too risky and just another name of gamble but they don’t
know it’s not at all that risky for long investor
RESEARCH METHODOLOGY
 Sampling:

The sampling was collected from 60 client of Narnolia Securities Ltd.

 Data collection:

Primary data
I have taken mostly primary data through questionnaire, customer
interviews and observation methods to get more reliable information.
Secondary data
secondary data has also been collected through various secondary sources
like magazines, books and company profile through websites.
Derivatives
Derivative is a product whose value is derived from
the value of one or more basic variables i.e.
underlying asset in a contractual manner. The
underlying asset can be equity, forex, commodity or
any other asset. For example, wheat farmers may
wish to sell their harvest at a future date to eliminate
the risk of a change in prices by that date. Such a
transaction is an example of a derivative.
Types of Derivetives
 Forward: - A forward contract is a customized contract between two
entities, where settlement takes place on a specific date in the future at
today's pre-agreed price.

Future: - A futures contract is an agreement between two parties to buy or

sell an asset at a certain time in the future at a certain price. Futures contracts
are special types of forward contracts in which exchange act as a mediator
and it is also known as standardized exchange-traded contracts.

Option: -Options are of two types - calls and puts. Calls give the buyer the
right but not the obligation to buy a given quantity of the underlying asset, at
a given price on or before a given future date. Puts give the buyer the right,
but not the obligation to sell a given quantity of the underlying asset at a
given price on or before a given date.
Call option: A call option gives the holder the
right but not the obligation to buy an asset by a
certain date for a certain price.
Put option: A put option gives the holder the
right but not the obligation to sell an asset by a
certain date for a certain price.
Option price/premium: Option price is the price
which the option buyer pays to the option seller. It
is also referred to as the option premium
Option Terminology
 Index options: These options have the index as the underlying.
Some options are European while others are American. Like index
futures contracts, index options contracts are also cash settled.
 Stock options: Stock options are options on individual stocks.
Options currently trade on over 500 stocks in the United States. A
contract gives the holder the right to buy or sell shares at the
specified price.
 Buyer of an option: The buyer of an option is the one who by
paying the option premium buys the right but not the obligation to
exercise his option on the seller/writer.
 Writer of an option: The writer of a call/put option is the one
who receives the option premium and is thereby obliged to
sell/buy the asset if the buyer exercises on him. There are two
basic types of options, call options and put options.
 Expiration date: The date specified in the options contract is
known as the expiration date, the exercise date, the strike date or
the maturity.
 Strike price: The price specified in the options contract is
known as the strike price or the exercise price.
 American options: American options are options that can be
exercised at any time upto the expiration date. Most exchange-
traded options are American
 European options: European options are options that can be
exercised only on the expiration date itself. European options are
easier to analyze than American options, and properties of an
American option are frequently deduced from those of its
European counterpart.
In-the-money option: An in-the-money (ITM) option is an
option that would lead to a positive cash flow to the holder if it
were exercised immediately. A call option on the index is said to
be in-the-money when the current index stands at a level higher
than the strike price (i.e. spot price > strike price). If the index is
much higher than the strike price, the call is said to be deep ITM.
In the case of a put, the put is ITM if the index is below the strike
price.
At-the-money option: An at-the-money (ATM) option is an
option that would lead to zero cashflow if it were exercised
immediately. An option on the index is at-the-money when the
current index equals the strike price (i.e. spot price = strike price).
Out-of-the-money option: An out-of-the-money (OTM) option is an option that
would lead to a negative cash flow if it were exercised immediately. A call option on
the index is out-of-the-money when the current index stands at a level which is less
than the strike price (i.e. spot price < strike price). If the index is much lower than
the strike price, the call is said to be deep OTM. In the case of a put, the put is OTM
if the index is above the strike price.
Intrinsic value of an option: The option premium can be broken down into two
components - intrinsic value and time value. The intrinsic value of a call is the
amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero.
Putting it another way, the intrinsic value of a call is Max[0, (St — K)] which means
the intrinsic value of a call is the greater of 0 or (St — K). Similarly, the intrinsic
value of a put is Max[0, K — St],i.e. the greater of 0 or (K — St). K is the strike
price and St is the spot price.
Time value of an option: The time value of an option is the difference between its
premium and its intrinsic value. Both calls and puts have time value. An option that
is OTM or ATM has only time value. Usually, the maximum time value exists when
the option is ATM. The longer the time to expiration, the greater is an option's time
value, all else equal. At expiration, an option should have no time value.
Option Strategies
In finance an option strategy is the purchase and/or sale of
one or various option positions and possibly
an underlying position.
Options strategies can favor movements in the underlying
that are bullish, bearish or neutral. In the case of neutral
strategies, they can be further classified into those that are
bullish on volatility and those that are bearish on volatility.
The option positions used can be long and/or short positions
in calls and/or puts at various strikes.
 Bullish Strategies: Bullish options strategies are employed when the
options trader expects the underlying stock price to move upwards. It is
necessary to assess how high the stock price can go and the time frame in
which the rally will occur in order to select the optimum trading strategy
 Bearish Strategies: Bearish options strategies are the mirror image of
bullish strategies. They are employed when the options trader expects the
underlying stock price to move downwards. It is necessary to assess how low
the stock price can go and the time frame in which the decline will happen in
order to select the optimum trading strategy
 Neutral Strategies: Neutral strategies in options trading are employed when
the options trader does not know whether the underlying stock price will rise
or fall. Also known as non-directional strategies, they are so named because
the potential to profit does not depend on whether the underlying stock price
will go upwards or downwards.
 Bullish on volatility: Neutral trading strategies that are bullish on volatility
profit when the underlying stock price experiences big moves upwards or
downwards.
 Bearish on volatility: Neutral trading strategies that are bearish on volatility
profit when the underlying stock price experiences little or no movement.
Contd…
1. Long Call: If an investor thinks that the value of stock or index
will go up then only he will use this option strategy.
2. Short Call : When the investor thinks that the Index or Stock will
go down or it will be bearish in near future then only he uses this
strategy.
3. Long Put : Buying a Put is the opposite of buying a Call. Investor
buys call when he is bullish but when he is bearish for near future
then he uses long put strategy.
4. Short Put : Selling a Put is opposite of buying a Put. An investor
Sells Put when he is Bullish about the stock – expects the stock price
will go up or stay sideways at the minimum.
5. Synthetic C all :In this strategy, we purchase a stock since we feel
bullish about it but on the other hand we think what happened if the
price of the stock went down.
Covered Call : This is often employed when an investor has a short-term neutral to
moderately bullish view on the stock he holds. He takes a short position on the Call
option to generate income from the option premium.
Long Combo : A Long Combo is a Bullish strategy. If an investor is expecting the price
of a stock to move up he can do a Long Combo strategy. It involves selling an OTM Put
and buying an OTM Call.
Protective Call : This is a strategy wherein an investor has gone short on a stock and
buys a call to hedge. This is an opposite of Synthetic Call (Strategy 3). An investor shorts
a stock and buys an ATM or slightly OTM Call.
Covered Put : This strategy is opposite to a Covered Call. A Covered Call is a
neutral to bullish strategy, whereas a Covered Put is a neutral to Bearish strategy.
Long Straddle : A Straddle is a volatility strategy and is used when the
stock price / index is expected to show large movements. This strategy
involves buying a call as well as put on the same stock / index for the
same maturity and strike price
Short Straddle : A Short Straddle is the opposite of Long Straddle. It is a
strategy to be adopted when the investor feels the market will not show much
movement. He sells a Call and a Put on the same stock / index for the same maturity
and strike price
 Long Strangle : A Strangle is a slight modification to the Straddle to make it
cheaper to execute. This strategy involves the simultaneous buying of a slightly out-
of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same
underlying stock / index and expiration date
 Short Strangle : A Short Strangle is a slight modification to the Short Straddle. It
tries to improve the profitability of the trade for the Seller of the options by
widening the breakeven points so that there is a much greater movement required
in the underlying stock / index, for the Call and Put option to be worth exercising.
Collar : A Collar is similar to Covered Call but involves another leg – buying
a Put to insure against the fall in the price of the stock. It is a Covered Call
with a limited risk. So a Collar is buying a stock, insuring against the
downside by buying a Put and then financing the Put by selling a Call.
Finding & Observation
 Investors are not much aware about the derivatives market
as well as the future and options.
 Value of an option depends upon the strike price,
expiration date, value of underlying asset etc.
 Value of an option comprises intrinsic value of option and
time value of option.
 Option values have lower and upper boundaries.
 It was also observed that many broking houses offering
internet trading allow clients to use their conventional
system as well just ensure that they do not loose them and
this instead of offering-broking services they becomes
service providers
Conclusion
Derivatives are extremely important and have a big impact on other
financial market and the economy. The project is designed to upgrade
investor’s knowledge with the basics of how to make investment
decisions in futures and options with reference to bear market. It is
important for the investors that they must analyze the fundamental
(Economic & Financial), technical and other factors for dealing in
futures and options. For many investors options are useful as tools of
risk management. Different Option Strategies and the options help to
earn a risk-less profit. The option strategies are used according to the
nature of market condition. If market is bullish - Long Call, Covered
Call is useful. In case of bearish market Long Call and Long Put option
strategies is useful. In neutral option - Condor and Long Straddle is
useful tools for the investment
Recommendation

I recommend the exchange authorities to take steps to educate investors about
their rights and duties. I suggest to the exchange authorities to increase the
investors confidences.

I also recommend the exchange authorities to appoint a well educated persons,
so that he can provide the basic information to the client regarding the future
and options.

I recommend the exchange authorities to be vigilant to curb wide fluctuations
of prices.

The speculative pressures are responsible for the wide changes in the price, not
attracting the genuine investors to the greater extent towards the market.

Genuine investors are not at all interested in the speculative gain as their
investment is based on the future profits, therefore the authorities of the
exchange should be more vigilant to curb the speculation.

Necessary steps should be taken by the exchange to deal with the situations
arising due to break down in online trading.
Bibliography
Books:
 Guide To Indian Stock Market, By Jitendra Gala
 Kothari C.R., Research Methodology, New Delhi, Vikas
Publishing House pvt.Ltd. 1978

Websites:
 www.google.com
 www.bseindia.com
 www.nseindia.com
 www.moneycontrol.com
THANK YOU