SUMMER INTERNSHIP PROJECT

Conducted At
ANMOL SHARE BROKING LIMITED

Submitted by

KHUSHBU PARWEEN
PG14037

In partial fulfilment of the requirement

For award
Of

PGDM

IN

FINANCE

JUNE 2015

Certificate

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This is to certify that Mr./Ms……………….., Roll no………………., student of PGDM has successfully completed his/her
project on ……………………………………………………”,in partial fulfillment for the award of degree of PGDM during the
academic session 2014-15.The project report has been approved as it satisfies the academic requirements
prescribed for the said degree.

Guide HOD

Examiner

In COMPANY LETTER HEAD

CERTIFICATE (sample)

Certified that this project/Internship report titled ……………………………………………..” is the bonafide work

of “…………..<NAME OF THE CANDIDATE(S)>.…………” who carried out the project/Internship work under

my supervision.

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 SIGNATURE

Corporate Guide (Full Name & Designation)

Company Seal

Declaration

I khushbu parween, Roll no pg14037, student of PGDM of ISBR Business School, Bangalore hereby declare that the
research project report on “ long calendar spread”, is an original and authenticated work done by me. I further
declare that it has not been submitted elsewhere by any other person in any of the University for the Award of any
degree or diploma.

Date: Name of student

Khushbu parween

3
 Acknowledgement

I hereby take this opportunity to thank ANMOL SHARE BROKING LTD, for providing me a
corporate exposure through the course of my summer internship.
I would like to express my sincere gratitude towards my company’s chief of operation Mr
MOHIT BAJAJ and company guide Mr AMITH SHUKLA, for providing me great insights
about stock markets, real estate, mutual funds and various other ventures, for guiding me all
throughout and for being a great support.
I would also like to thank Mr PADMANAVAN, my faculty guide for instructing me and giving
me her valuable advice on my project.
I would thank Mr Prakash Kumar, Mr Sumit, Mrs hiral shah and all members of anmol share
family who were a great co-operation and help all throughout.

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I would like to extend my gratitude to ISBR Bangalore, for providing me such a platform. Last
but not the least all my friends and family for their support and co-operation.

Thanking You,
Khushbu parween
PG14037

Contents

Executive Summary Page no.7

Chapter I
i. Introduction Page no.8

Chapter II
i. objective of study Page no.20
ii. Literature review Page no.21
iii. Hypothesis Page no.22
iv. Research design/ methodology Page no.70

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Chapter III
i. Data Analysis Page no.74
ii. Result discussion Page no.81

Chapter IV
i. Conclusion and recommendations Page no.84
ii. Limitations of the study Page no.85

Appendix
i. Bibliography Page no.83

Executive summary

Investing in stocks requires time, knowledge and constant monitoring of the market. Presently,
no individual investors would like put all his money in the shares of one company, for that would
amount to greater risk.
The business of portfolio management has never been an easy one. Dealing with the limited
choices in hand with the twin requirements of adequate safety and maximum returns is a task
fraught with complexities.
To make the right decision about investing it is always better to make simultaneous usage of both
fundamental and technical analysis. Fundamental analysis is basically getting an understanding
6
of a company, the health of its business and its future prospects. Whereas, technical analysis is a
security analysis methodology for forecasting the direction of prices through the study of past
market data, primarily price and volume.
Given the unpredictable nature of the market it requires in-depth experience and strong research
to make the right decision. In the end it is all about making the right move in the right direction
at the right time.
There are various kinds of risk which is mainly categorize in two parts1. Macro level risk 2.
Micro level risk
I. Macro level risk:- It consist of Systematic and Unsystematic Risk. Systematic risk is that
which cannot be reduced but Unsystematic risk can be controlled.
II. Micro Level risk:- It consist of various kinds of risk which are prevailing in the market like
Business risk, Market risk, Liquidity risk, Exchange rate risk, Financial risk, Currency risk and
Country risk The above are the broad categories of the risk in the market. As we can see from the
recession that the global markets also have their impact on the Indian market because now a days
companies are doing business at global level so the market of one country can affect the market
of other countries also. So we cannot avoid the risk but we can manage the risk and minimize it.
In my project I have done the same thing by applying the long calendar spread and different
option strategy which are helpful to manage the risk while doing an investment.

CHAPTER I

INTRODUCTION:
INDUSRTY PROFILE

The stock broking industry is a service-oriented industry where brokers act as agents for

investors when a security is bought or sold and are compensated with a commission. Investors

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would not hesitate to switch to alternative brokerage houses if they do not obtain satisfaction.

Providing quality service and hence customer satisfaction should thus be recognised as a key

strategy and a crucial element of long-run success and profitability for stock broking businesses

Financial Services industry is a term used to refer to the industry which provides services to the

financial market. Financial Services industry is also the term used to describe organizations that

deal with the management of money. The financial service industry is highly fragmented. The

production of this industry is divided among few different companies but, however, no single

firm is large enough to be able to influence the industry’s direction or price level.

Industry Composition: The financial services industry is comprised of variety of businesses

providing services broadly related to insurance, accounting, banking, brokerage, real estate, risk

analysis, asset management, and investment.

 Insurance firm either provide insurance themselves as insurance carriers or sell the services

of the other as insurance brokers.

 Banks can be commercial or private on global, national, regional or community level, and

offer the safeguarding and lending of money as their primary service.

 Brokerage firms act as intermediaries between buyers and sellers for a variety of financial

products such as securities, equities and other investment offerings.

 Real Estate firms provide services such as buying, selling, developing, operating, and

managing real estate the part of industry in which the firm is situated is directly linked to the

stock market of the country.

History of Indian Stock Exchange- The origin-Pre Independence

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One of the oldest stock market in Asia is the Indian stock market. It dates back to the close of

18th century when the East India Company used to transact loan securities. In the 1830s, trading

on corporate stocks and shares in Bank and Cotton presses took place in Bombay. There were

only half dozen brokers during 1840 and 1850 though the trading was broad.

From the mid-1850s, under a banyan tree opposite the Town Hall of Bombay an informal group

of 22 stockbrokers began trading, each investing a princely amount of Rupee 1.This banyan tree

still stands in the Horniman Circle Park, Mumbai. In the year 1860, the Exchange flourished with

60 brokers. In fact the 'Share Mania' in India began with the American Civil War broke and the

cotton supply from the US to Europe stopped.250 brokers increased further. The informal group

of stockbrokers organized themselves as “The Native Share and Stockbrokers Association”

which, in 1875, was formally organized as the Bombay Stock Exchange (BSE). BSE was shifted

to an old building near the Town Hall. In 1928, the plot of land on which the BSE building now

stands (at the intersection of Dalal Street, Bombay Samachar and Hammam Street in downtown

Mumbai) was acquired, and a building was constructed and occupied in 1930.Premchand

Roychand was a leading stockbroker of that time, and he assisted in setting out traditions,

conventions, and procedures for the trading of stocks at Bombay Stock Exchange and they are

still being followed. Several stock broking firms in Mumbai were family run enterprises, and

were named after the heads of the family.

The following is the list of some of the initial members of the exchange, and who are still

Running their respective business:

 D.S. Prabhudas & Company (known as DSP, and a joint venture partner with

Merrill Lynch)

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 Jamnadas Morarjee (known as JM)

 Champaklal Devidas (called Cifco Finance)

 Brijmohan Laxminarayan.

Post-independence to Present

Under the Securities Contracts (Regulation) Act, in the year 1956, the Government of India

recognized the Bombay Stock Exchange as the first stock exchange in the country. After 1992

the most decisive period in the history of the BSE took place. In the aftermath of a major scandal

with market manipulation involving a BSE member named Harshad Mehta, BSE responded to

calls for reform with intransigence. The foot-dragging by the BSE helped radicalize the position

of the government, which encouraged the creation of the National Stock Exchange (NSE), which

created an electronic marketplace. On 4 November 1994 NSE started trading. Within less than a

year, NSE turnover exceeded the BSE. BSE rapidly automated, but it never caught up with NSE

spot market turnover. In the following 2 years the second strategic failure at BSE came. NSE

embarked on the launch of equity derivatives trading. BSE responded by political effort, with a

friendly SEBI chairman (D. R. Mehta) aimed at blocking equity derivatives trading. By roughly

5 years the BSE and D. R. Mehta succeeded in delaying the onset of equity derivatives trading.

But this trading, and the accompanying shift of the spot market to rolling settlement, did Come

along in 2000 and 2001 - helped by another major scandal at BSE involving the President Mr

Anand Rathi. NSE scored nearly 100% market share in the runaway success of equity derivatives

trading, thus consigning BSE into clearly second place. Today, NSE has roughly 66% of equity

spot turnover and roughly 100% of equity derivatives turnover.

COMPANY PROFILE

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Anmol is an investment management company that offers its clients a wide breadth of experience
and knowledge in financial planning. Its professional team consists of member with over a
decade of experience in the financial service sector. Its client list include all class of investor
from individuals, family groups, corporations, trusts and institutions with assets of over INR 500
Crores under its management. Its deep understanding of the different financial products, the
taxation policies and investment requirements helps in objective and unbiased guidance to its
valued customers helping them to manage their financial future.

Anmol Share broking, being a member of National Stock Exchange (NSE), Bombay
Stock Exchange (BSE) and Multi-Commodity Exchange (MCX) provides a platform for
execution and trading in the capital markets through online as well as offline mode. Also a
member of Central Depository Services (India) Limited (CDSL), it provides hassle free
Depository Services to its client as well.

Its State of art web-based platform gives access to a broad range of Investment Products
in online mode as well as traditional mode which provides flexibility and ease, with online
access anywhere, at any time.

Combining all the viable products under a single umbrella to protect and prosper our valued
client’s wealth, we strive and aim for their financial prosperity.

AREA OF OPERATIONS:
Online trading:

Anmol Share Broking with the help of its state of heart web based network helps its clients to
carrying over online trading of shares in various segments of the share market. The organization
operates in both Equity markets and also in derivatives.

Commodity trading:

Anmol Share Brokerage operates in the area of commodity trading under its branch Anmol
Commodity Brokerage Ltd which is enabled with experts in the commodity trading and a
separate web based platform for its operation in the commodity sector.

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Mutual Funds

Anmol Shares under with the help of its experience in the financial product market helps its
customers to understand and select suitable mutual funds for their future investment needs. Also
it provides advisory service for building up suitable Systematic Investment Plan (SIP).

Insurance

Anmol Shares offers a basket option of investment products which include insurance service. It
provides insurance services in both general and life insurance sectors

AIM & ESTABLISHMENT OF THE COMPANY

a) When was it established and by whom?

Anmol share broking ltd is a dynamic and rapidly growing organization. Anmol as an
organization were founded in the year 2006 by Mr Mahesh Bajaj, experienced in the investments
and financial services segment for close to two and a half decades. Group consisting of
professionals from various sectors in the financial industry. One Stop Solution for all your
financial needs, be it as an individual or as a corporate. Offers a range of services starting from
Tax Planning to Insurance (life, medical, general) to Real Estate to Investments & Stock Broking

b.)Vision, Mission, Goals, Aims and the Policies developed:

MISSION
Cater to ALL of India on ALL their financial and investment matters. We wish for, all who visit
us, to have all their finances and investments sorted out and handled at one place in a
professional manner.

Be an admired and well-respected financial services organisation and contribute, partner with
you to increase your financial prosperity by providing best services and great value.

VISION

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To be the largest and most profitable financial services organization in Indian market and become
one stop shop for all non-banking financial products and services for the retail customers. Help
develop the economy by catering to all its financial and investment needs by utilizing all of our
vast experience.

AIM

Aim to be among the top 3 players in existing products within next 3 years.

QUALITY POLICY
We are committed to providing world-class products and services which exceed the expectations
of our customers, achieved by teamwork and a process of continuous improvement
.Confidentiality, Consistency, Correct Advise and Cumulative Growth, bears the top priority in
our endeavour to build strong client relationships.

BUSINESS PHILOSOPHY
 Ethical practices & transparency in all our dealings
 Customers interest above our own
 Always deliver what we promise
 Effective cost management

c.) Its position/stage in the life cycle.

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The business life cycle is a model that enables businessmen to identify the level of performance
at which their business is operating and to determine exactly what needs to be done to move to
the next level.

The various levels of a business life cycle are:

 Start up
 Rapid Growth
 Maturity
 Decline
 Re-birth/ death

d.) Types of services/products given/produced:

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PRODUCTS & SERVICES PROFILE

 Equity and Derivative Trading:

Equity trading is offered to retail clients through different channels in the Bombay Stock
Exchange (BSE) and The National Stock Exchange (NSE), for cash and derivatives segments.

 Online Trading:

Various portals that offer online trading to retail investors in BSE and NSE, cash and derivatives
segment. The investor can do their own trading through a browser-based interface as well as
streamer-based solutions. This service is also available through IVR facility for those clients who
are not able to access the internet service at any given point of time.

 Commodity Trading:

Anmol Share broking is a registered member of Multi Commodity Exchange (MCX) and
provides the service of commodity trading in the name of Anmol Commodity Broking Ltd.

 Depository Services:

The organization is a depository participant with the Central Depository Service Ltd. And
provides Depository Service to its clients.

 Portfolio management and Fund Management Services:

Anmol advises, manages and administers the securities and funds on behalf of entrusting clients.
This service is very similar to Mutual Fund Managers the difference between a portfolio
management service and mutual fund management lies in the customization of service level in
form of reporting transaction, holding statements. It is comparable or even better than of mutual
fund managers.

 Mutual funds and IPO’s:

Mutual Funds and IPO distribution service is provided to retail investors directly through its
branch network. Investor awareness campaign is carried on social media regularly to highlight
15
the importance of investing in mutual funds. Especially through the Systematic Investment Plans
(SIP). Advisory is provided on IPO’s and only public issue of merit is marketed to the retail
investors.

The other services offered by Anmol include DP accounts, Life Insurance, General
Insurance, Real Estate services, Fund margins, bonds and fixed deposits.

 Infrastructural facilities

Anmol Share brokerage is ideally located in the heart of city surrounded by famous land
marks which makes it easily accessible for prospective clients to visit and clarify their
inquiries.

The interiors of the organization are designed to bring in the feel of professional corporate
entity. The back office of the organization where the end operation is carried has cubicles
which provide employees full concentration on the work. On the other hand the trading block
in well-organized with excellent computers system and no cubicles which ensures that
employee interacts to clarify their doubts and helps the management to supervise the
activities.

The organization is air conditioned and well lit up. Also keeping in mind the nature of
business and the dependency of the operation on electricity and computer systems the
organization has excellent backup systems and to cope up with dire emergencies of acute
power cut the organization also has a ready generator to help in carrying the operation
without any stoppage.

SWOT ANALYSIS OF ANMOL SHARE BROKERAGE LTD:

SWOT analysis is a structured planning method to evaluate the strengths, weakness,

Opportunities and threats involved in a business venture. It involves specifying the objective

of the business venture and identifies the internal and external factors that are favourable and

Unfavourable to achieve the objective. This technique is credited to Albert Humphrey.

STRENGTHS

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 These are the characteristics of the business organization that give it an advantage over its

Competitors.

• Well experienced and technically competent management and staff.

• Over a period of time Anmol shares has forged a personal bond with its clients which

adds an advantage to its customer service capabilities.

• Charging a fairly competitive commission rates in comparison to its competitors.

• An array of investment products are offered to investors to cater to the varied financial
needs of its clients.

• A strict control and vigilant policy of margin requirement.

• Equal focus on client acquisition as well as retention through better service.

• Focus on the acquisition of the retail investor client than the high net worth individual

Which is being followed by its competitors.

WEAKNESS

These are the characteristics that place the business at a disadvantage relative to others

• Inadequate human resource at certain levels.

• Dip in the client activity levels.

• Lower promotional activity than in comparison to its competitors

OPPORTUNITIES

These are the elements in the external environment that the business could exploit to its

Advantage.

• To be a leading broking services provided firm.

• Diversification: Anmol Shares has a option of entering into NBFC sector and financial

education to its clients.

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• Flexible Cost Structure: With improved innovation in the technology and

development of mobile trading application, the rigid cost structure has come under

control and enhanced the profitability of the stock broking firms.

THREATS

These are the elements in the business environment that could cause trouble for the

organization.

• Protecting brokerage yields and market share in highly competitive and fragment

Equity brokerage market.

• Achieving a critical scale of operation and managing costs to sustain profitability even

in the prolonged dull phase.

• Volatility of the returns and profitability due to linkage of the sector with the vagaries

of capital market and increasing cost of regulatory compliance.

• Greater dominance and expansion of foreign brokerage houses in the institutional

broking segment.

• Trends of consolidation and merger by bigger players and entry of big player from

Other sector to equity brokerage sector.

FUTURE GROWTH AND PROSPECTSS

• To open up more number of branches across the city and also the country.

• To increase their client base.

• Diversification of services

COMPETITORS

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Major players in the region are as follows:-

1) RELIANCE MONEY

-Anil Dhirubhai Ambani Group

2) ANGEL BROKING

-service truly personalized

3) INDIABULLS

4) HDFC SECURITIES

5) KOTAK SECURITIES

6) ICICI DIRECT.COM

7) INDIAINFOLINE

-it’s all about money, honey!

8) BONANZA

-make money, not mistake

9) NIRMAL BANG

-Relationship beyond broking

10) KARVY

MARKETING STRATEGY
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 Anmol share is focused on capturing the significant growth opportunities in the financial
services market and its strategy is driven by the following key principles:-

Client Referral Programs: Client referrals are the most reliable and most cost-effective source of
new clients. We help firms maximize their success by creating process and tools that make
generating client a referrals a natural and systematic part of the practice.

Client Retention Programs: Maintaining and leveraging existing client relationships is far less
expensive and more productive than trying to acquire new clients. We help organizing develop
effective client communication programs that build stronger client relationships, encourage
referrals, and produce incremental business.

New Client Acquisition Programs: A diverse mix of campaigns including events, public relations,
advertising and direct marketing is an effective means of acquiring new clients

CHAPTER II

OBJECTIVE OF STUDY

 To understand all about different investment avenues available in India

 To find out how the investors get information about the various financial instrument.

 What are the various factors that they consider before investing.

 To find out the risk profile of the investor.

 To give a recommendation to the client whether using long calendar strategy would be
beneficial or not.

SCOPE OF THE STUDY

• This project is concentrated to the study of stocks of NSE nifty.

• It is focused on past 3 year’s data of NSE.

• The closing price of the stocks for the purpose of the study was limited.
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 It is the dawn of a new era for individual investors. Don't get left behind!

LITERATURE REVIEW

THE BACKGROUND

The Securities Brokerage Industry is cyclical and comprised of two distinct types of businesses.
Brokerages, also known as financial services companies, strive to meet the investing needs of
their clients, and exchanges facilitate securities trading. Net profits correlate to the performance
of the broader equity market.

In this market with less differentiated products and many players, there exists an oligopoly
(saying in book terms), characterized by tough competition, entry and exit barriers and many
more.

a) Al Ries and Jack Trout, in his work said “differentiate or die”, too many less differentiated
products creates a kind of information overload, and in this clutter of too much information,
products which are not properly differentiated or advertised just end up becoming a me too
product. To avoid it every marketer needs to position his/ her products in a way that makes a
specific image in the minds of consumers.

b) Jack Miller, in his work published on June 03, 2010, talked about how investors make
investment decisions. He broke the process of decision making in pulling the buy or sell trigger.
According to him investors made the investment decisions in the ways like simple screening,
then lateral recommendation, followed by piggy bank investing.

c) According to U.S. Securities and Exchange Commissions’, one of the articles: investors first
evaluate their current financial roadmap, and then they evaluate their comfort zone in taking on
risk. Consider an appropriate mix of investments, create and maintain an emergency fund,
consider dollar averaging, consider rebalancing portfolio occasionally, and in the process also try
to avoid the circumstances that can lead to fraud.

Financial Market:

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MONEY MARKET:

The Money Market refers to the market where borrowers and lenders exchange short-term funds
to solve their liquidity needs

CAPITAL MARKET:

The Capital Market is a market for financial investments that are direct or indirect claims to
capital (Gart, 1988).

SECURITIES MARKET:

It refers to the markets for those financial instruments/claims/obligations that are commonly and
readily transferable by sale. It has two inter-dependent and inseparable segments, the new issues
(primary) market and the stock (secondary) market.
STOCK MARKET:

Stock market is a market where both listed and unlisted companies trading takes place. It is
different from the stock exchange as stock markets include the stock exchanges of the country.

The stock market can be or the capital market can be divided into two segments

 Primary market

 Secondary market

Primary market:

Most of the companies are usually started privately by their promoters. For running the business
over long term the promoter’s capital and the borrowed capital from the banks or financial
institution might not be sufficient. That is when the long term funds by issuing securities in the
form of debt and majorly equity are raised by the corporate and the government in the primary
market

Secondary market:
The secondary market is the place which provides liquidity to the investors in the primary
market. If there was no medium to liquidate our position, today we would not invest in any
instrument. The secondary market provides an efficient trading of those securities which are
initially offered in the primary market.

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Through the stock exchanges trading is done in the secondary market; the stock exchange is the
place where the shares are traded in an organised manner by the buyers and sellers.
There are two leading stock exchanges in India which help us to trade in shares

Through the stock exchanges trading is done in the secondary market; the stock exchange is the
place where the shares are traded in an organised manner by the buyers and sellers. There are two
leading stock exchanges in India which help us to trade in shares

 Bombay Stock Exchange (BSE): BSE was set up in the year 1875 it is the oldest stock
exchange in Asia. It has evolved in to its present status as a premier stock exchange. Some
scrip’s which are not listed in NSE will be found at BSE. Also BSE has the largest number of
scrip’s listed.

 National Stock Exchange (NSE): The National Stock Exchange of India Ltd. (NSE), set up
in the year 1993, is today the largest stock exchange in India and a preferred exchange for
trading in equity, debt and derivatives instruments by investors. NSE has set up a sophisticated
electronic trading, clearing and settlement platform and its infrastructure serves as a role model
for the securities industry. The standards set by NSE in terms of market practices; products and
technology have become industry benchmarks and are being replicated by many other market
participants. NSE has four broad segments Wholesale Debt Market Segment (commenced in
June 1994), Capital Market Segment (commenced in November 1994) Futures and Options
Segment (commenced June 2000) and the Currency Derivatives segment (commenced in August
2008). Various products which are traded on the NSE include, equity shares, bonds, debentures,
warrants, exchange traded funds, mutual funds, government securities, futures and options on
indices & single stocks and currency futures. Today NSE’s share to the total equity market
turnover in India averages around 72% whereas in the futures and options market this share is
around 99%.

INTRODUCTION OF DERIVATIVES

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The emergence of the market for derivative products, most notably forwards, futures and options,
can be traced back to the willingness of risk-averse economic agents to guard themselves against
uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets
are marked by a very high degree of volatility. Through the use of derivative products, it is
possible to partially or fully transfer price risks by locking-in asset Prices. As instruments of risk
management, these generally do not influence the Fluctuations in the underlying asset prices.
However, by locking-in asset prices, Derivative products minimize the impact of fluctuations in
asset prices on the Profitability and cash flow situation of risk-averse investors. Derivatives are
risk management instruments, which derive their value from an underlying asset. The underlying
asset can be bullion, index, share, bonds, Currency, interest, etc., Banks, Securities firms,
companies and investors to hedge risks, to gain access to cheaper money and to make profit, use
derivatives .Derivatives are likely to grow even at a faster rate in future

DEFINITION OF DERIVATIVES

“Derivative is a product whose value is derived from the value of an

underlyingasset in a contractual manner. The underlying asset can be equity, Forex, commodity
or any other asset.”

Securities Contract (regulation) Act, 1956 (SC(R) A) defines “debt instrument, share, loan
whether secured or unsecured, risk instrument or contract for differences or any other form of
security”

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

HISTORY OF DERIVATIVES:

With the opening of the economy to multinationals and the adoption of the liberalized economic
policies, the economy is driven more towards the free market economy. The complex nature of
financial structuring itself involves the utilization of multi-currency transactions. It exposes the
clients, particularly corporate clients to various risks such as exchange rate risk, interest rate risk,
economic risk and political risk. With the integration of the financial markets and free mobility

24
of capital, risks also multiplied. For instance, when countries adopt floating exchange rates, they
have to face risks due to fluctuations in the exchange rates. Deregulation of interest rate cause
interest risks. Again, securitization has brought with it the risk of default or counter party risk.
Apart from it, every asset—whether commodity or metal or share or currency—is subject to
depreciation in its value. It may be due to certain inherent factors and external factors like the
market condition, Government’s policy, economic and political condition prevailing in the
country and so on.
In the present state of the economy, there is an imperative need of the corporate clients to protect
their operating profits by shifting some of the uncontrollable financial risks to those who are able
to bear and manage them. Thus, risk management becomes a must for survival since there is a
high volatility in the present financial markets.
In this context, derivatives occupy an important place as risk reducing machinery. Derivatives
are useful to reduce many of the risks discussed above. In fact, the financial service companies
can play a very dynamic role in dealing with such risks. They can ensure that the above risks are
hedged by using derivatives like forwards, future, options, swaps etc. Derivatives, thus, enable
the clients to transfer their financial risks to the financial service companies. This really protects
the clients from unforeseen risks and helps them to get there due operating profits or to keep the
project well within the budget costs. To hedge the various risks that one faces in the financial
market today, derivatives are absolutely essential
.
THE GROWTH OF DERIVATIVES MARKET:

Over the last three decades, the derivatives markets have seen a phenomenal growth. A large
variety of derivative contracts have been launched at exchanges across the world. Some of the
factors driving the growth of financial derivatives are:
Increased volatility in asset prices in financial markets,
Increased integration of national financial markets with the international markets,
Marked improvement in communication facilities and sharp decline in their costs,
Development of more sophisticated risk management tools, providing economic agents a
wider choice of risk management strategies, and

25
Innovations in the derivatives markets, which optimally combine the risks and returns over a
large number of financial assets leading to higher returns, reduced risk as well as transactions
costs as compared to individual financial assets

DERIVATIVES IN INDIA

In India, all attempts are being made to introduce derivative instruments in the capital market.
The National Stock Exchange has been planning to introduce index-based futures. A stiff net
worth criteria of Rs.7 to 10 corers cover is proposed for members who wish to enroll for such
trading. But, it has not yet received the necessary permission from the securities and Exchange
Board of India.
In the forex market, there are brighter chances of introducing derivatives on a large scale. In
fact, the necessary groundwork for the introduction of derivatives in forex market was prepared
by a high-level expert committee appointed by the RBI. It was headed by Mr. O.P. Sodhani.
Committee’s report was already submitted to the Government in 1995. As it is, a few derivative
products such as interest rate swaps, coupon swaps, currency swaps and fixed rate agreements
are available on a limited scale. It is easier to introduce derivatives in forex market because most
of these products are OTC products (Over-the-counter) and they are highly flexible. These are
always between two parties and one among them is always a financial intermediary.

However, there should be proper legislations for the effective implementation of derivative
contracts. The utility of derivatives through Hedging can be derived, only when, there is
transparency with honest dealings. The players in the derivative market should have a sound
financial base for dealing in derivative transactions. What is more important for the success of
derivatives is the prescription of proper capital adequacy norms, training of financial
intermediaries and the provision of well-established indices.
Brokers must also be trained in the intricacies of the derivative-transactions.
Now, derivatives have been introduced in the Indian Market in the form of index options and
index futures. Index options and index futures are basically derivate tools based on stock index.
They are really the risk management tools. Since derivate are permitted legally, one can use them
to insulate his equity portfolio against the vagaries of the market. Every investor in the financial

26
area is affected by index fluctuations. Hence, risk management using index derivatives is of far
more importance than risk management using individual security options. Moreover, Portfolio
risk is dominated by the market risk, regardless of the composition of the portfolio. Hence,
investors would be more interested in using index-based derivative. Products rather than
securities based derivative products.
There are no derivatives based on interest rates in India today. However, Indian users of hedging
services are allowed to buy derivatives involving other currencies on foreign markets. India has a
strong dollar- rupee forward market with contracts being traded for one to six month expiration.
Daily trading volume on this forward market is around $500 million a day. Hence, derivatives
available in India in foreign exchange area are also highly beneficial to the users.

RECENT DEVELOPMENTS
At present Derivative Trading has been permitted by the SEBI on derivative segment of the BSE
and the F&0 segment of the NSE. The natures of derivative contracts permitted are:

Index Futures contracts introduced in June, 2000.

Index options introduced in June, 2001, and
Stock options introduced in July 2001.

The minimum contract size of a derivative contract is Rs.2 lakhs. Besides the minimum contract
size, there is a stipulation for the lot size of a derivative contract. The lot size refers to number of
underlying securities in one contract.
The lot size of the underlying individual security should be in multiples of 100 and tractions, if
any should be rounded off to next higher multiple of 100. This requirement along with the
requirement of minimum contract size from the basis for arriving at the lot size of contract.
Apart from the above, there are market wide limits also. The market wide limit for index
products in NIL. For stock specific products it is of open positions. But, for option and futures
the following wide limits have been fixed.

30 times the average number of shares traded daily, during the previous calendar month in the
cash segment of the exchange.

27
10% of the number of shares held by non-promoters, i.e., 10% of the free float in terms of
number of shares of a company.

ELIGIBILITY CONDITIONS
The SEBI has laid down some eligibility conditions for Derivative exchange/Segment and it’s
clearing Corporation/House. They are as follows:

-The Derivatives Exchange/Segment shall have on-line surveillance capability to monitor

positions, prices, and volumes on a real time basis so as to deter market manipulation.
-The Derivatives Exchange/Segment should have arrangements for dissemination of information
about trades, quantities and quotes on a real time basis through at least two information-vending
networks, which are easily accessible to investors across the country.
- The Derivatives Exchange/Segment should have arbitration and investor grievances redressal
mechanism operative from all the four areas/regions of the country.
-The Derivatives Exchange/Segment should have satisfactory system of monitoring investor
complaints and preventing irregularities in trading.
-The Derivative Segment of the Exchange would have a separate Investor Protection Fund.
-The Clearing Corporation/House shall perform full innovation, i.e., the Clearing
Corporation/House shall interpose itself between both legs of every trade, becoming the legal
counter party to both or alternatively should provide an unconditional guarantee for settlement of
all trades.
-The Clearing Corporation/House shall have the capacity to monitor the overall position of
Members across both derivatives market and the underlying securities market for those Members
who are participating in both.
-The level of initial margin on Index Futures Contracts shall be related to the risk of loss on the
position. The concept of value-at-risk shall be used in calculating required level or initial
margins. The initial margins should be large enough to cover the one-day loss that can be
encountered on the position on 99% of the days.
- The Clearing Corporation/House shall establish facilities for electronic fund transfer (EFT) for
swift movement of margin payments.

28
-In the event of a member defaulting in meeting its liabilities, the Clearing Corporation/House
shall transfer client positions and assets to another solvent Member or close- out all open
positions.
-The Clearing Corporation/House should have capabilities to segregate initial margins deposited
by clearing members for trades on their own account and on account of his client. The Clearing
Corporations/House shall hold the clients’ margin money in trust for the client purposes only and
should not allow its diversion for any other purpose.
-The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the trades
executed on Derivatives exchange/ segment.

INVESTORS PROTECTION
The SEBI has taken the following measures to protect the money and interest of investors in the
Derivative market. They are as follows:
-Investor's money has to be kept separate at all levels and is permitted to be used only against
the liability of the Investor and is not available to the trading member or clearing member or
even any other investor.
-The Trading Member is required to provide every investor with a risk disclosure document,
which will disclose the risks, associated with the derivatives trading so that investors can take a
conscious decision to trade in derivatives.
-Investor would get the contract note duly time stamped for receipt of the order and execution of
the order. The order will be executed with the identity of the client and without client ID order
will not be accepted by the system. The investor could also demand the reconfirmation slip with
his ID in support of the contract note. This will protects him from the risk of price favour, if any,
extended by the Member.
-In the derivative markets, all money paid by the Investor towards margins on all open positions
is kept in trust with the Clearing House/ Clearing Corporation and in the event of default of the
Trading or Clearing Member the amounts paid by the client towards margins are segregated and
not utilized towards the default of the member. However, in the event of a default of a member,
losses suffered by the Investor, if any, on settled/ closed out position are compensated from the
Investor Protection Fund, as per the rules, byelaws and regulation of the derivative segment of
the exchanges.

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IMPORTANCE OF DERIVATIVES:
Thus, derivatives are becoming increasingly important in world markets as a tool for risk
management. Derivative instruments can be used to minimize risk. Derivatives are used to
separate the risks and transfer them to parties willing to bear these risks. The kind of hedging that
can be obtained by using derivatives is cheaper and more convenient than what could be
obtained by using cash instruments. It is so because, when we use derivatives for hedging, actual
delivery of the underlying asset is not at all essential for settlement purposes. The profit or loss
on derivative deal alone is adjusted in the derivative market. Moreover, derivatives do not create
any new risk. They simply manipulate risks and transfer them to those who are willing to bear
these risks. To cite a common example, let us assume that Mr X owns a car. If he does not take
insurance, he runs a big risk. Suppose he buys insurance, (a derivative instrument on the car) he
reduces his risk. Thus, having an insurance policy reduces the risk of owing a car. Similarly,
hedging through derivatives reduces the risk of owning a specified asset, which may be a share,
currency etc. Hedging risk through derivatives is not similar to speculation. The gain or loss on a
derivative deal is likely to be offset by an equivalent loss or gain in the values of underlying
assets. 'Offsetting of risks' in an important property of hedging transactions. But, in speculation
one deliberately takes up a risk openly. When companies know well that they have to face risk in
possessing assets, it is better to transfer these risks to those who are ready to bear them. So, they
Have to necessarily go for derivative instruments.

All derivative instruments are very simple to operate. Treasury managers and portfolio
managers can hedge all risks without going through the tedious process of hedging each day and
amount/share separately. Till recently, it may not have been possible for companies to hedge their
long term risk, say 10-15 year risk. But with the rapid development of the derivative markets,
now, it is possible to cover such risks through derivative instruments like swap. Thus, the
availability of advanced derivatives market enables companies to concentrate on those
management decisions other than funding decisions.
Further, all derivative products are low cost products. Companies can hedge a substantial portion
of their balance sheet exposure, with a low margin requirement. Derivatives also offer high
liquidity. Just as derivatives can be contracted easily, it is also possible for companies to get out

30
of positions in case that market reacts otherwise. This also does not involve much cost. Thus,
derivatives are not only desirable but also necessary to hedge the complex exposures and
volatilities that the companies generally face in the financial markets today.

TYPES OF DERIVATIVES

The following are the various types of derivatives.

Forwards
A forward contract or simply a forward is a contract between two parties to buy or sell an
asset at a certain future date for a certain price that is pre-decided on the date of the contract. The
future date is referred to as expiry date and the pre-decided price is referred to as Forward Price.
It may be noted that Forwards are private contracts and their terms are determined by the parties
involved.

A forward is thus an agreement between two parties in which one party, the buyer, enters
into an agreement with the other party, the seller that he would buy from the seller an underlying
asset on the expiry date at the forward price. Therefore, it is a commitment by both the parties to
engage in a transaction at a later date with the price set in advance. This is different from a spot
market contract, which involves immediate payment and immediate transfer of asset. The party
that agrees to buy the asset on a future date is referred to as a long investor and is said to have a
long position. Similarly the party that agrees to sell the asset in a future date is referred to as a
short investor and is said to have a short position. The price agreed upon is called the delivery
price or the Forward Price.
Forward contracts are traded only in Over the Counter (OTC) market and not in stock
exchanges. OTC market is a private market where individuals/institutions can trade through
negotiations on a one to one basis.

Futures:

Like a forward contract, a futures contract is an agreement between two parties in which
the buyer agrees to buy an underlying asset from the seller, at a future date at a price that is

31
agreed upon today. However, unlike a forward contract, a futures contract is not a private
transaction but gets traded on a recognized stock exchange. In addition, a futures contract is
standardized by the exchange. All the terms, other than the price, are set by the stock exchange
(rather than by individual parties as in the case of a forward contract). Als o, both buyer and
seller of the futures contracts are protected against the counter party risk by an entity called the
Clearing Corporation. The Clearing Corporation provides this guarantee to ensure that the buyer
or the seller of a futures contract does not suffer as a result of the counter party defaulting on its
obligation. In case one of the parties defaults, the Clearing Corporation steps in to fulfil the
obligation of this party, so that the other party does not suffer due to non-fulfilment of the
contract. To be able to guarantee the fulfilment of the obligations under the contract, the Clearing
Corporation holds an amount as a security from both the parties. This amount is called the
Margin money and can be in the form of cash or other financial assets. Also, since the futures
contracts are traded on the stock exchanges, the parties have the flexibility of closing out the
contract prior to the maturity by squaring off the transactions in the market.
The basic flow of a transaction between three parties, namely Buyer, Seller and Clearing
Corporation is depicted in the diagram below:

Options:

32
 Like forwards and futures, options are derivative instruments that provide the opportunity
to buy or sell an underlying asset on a future date.

An option is a derivative contract between a buyer and a seller, where one party (say First
Party) gives to the other (say Second Party) the right, but not the obligation, to buy from (or sell
to) the First Party the underlying asset on or before a specific day at an agreed-upon price. In
return for granting the option, the party granting the option collects a payment from the other
party. This payment collected is called the “premium” or price of the option.

The right to buy or sell is held by the “option buyer” (also called the option holder); the party
granting the right is the “option seller” or “option writer”. Unlike forwards and futures contracts,
options require a cash payment (called the premium) upfront from the option buyer to the option
seller. This payment is called option premium or option price. Options can be traded either on the
stock exchange or in over the counter (OTC) markets. Options traded on the exchanges are
backed by the Clearing Corporation thereby minimizing the risk arising due to default by the
counter parties involved. Options traded in the OTC market however are not backed by the
Clearing Corporation.

Warrants:

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

Leaps:

The acronym LEAPS means long-term Equity Anticipation securities. These are options having a
maturity of up to three years.

Baskets:

Basket options are options on portfolios of underlying assets. The underlying asset is usually a
moving average of a basket of assets. Equity index options are a form of basket options.

Swaps:

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Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts. The
two commonly used Swaps are:

Interest rate Swaps:

These entail swapping only the related cash flows between the parties in the same currency.

Currency Swaps:

These entail swapping both principal and interest between the parties, with the cash flows in on
direction being in a different currency than those in the opposite direction.

Swaption:

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

PARTICIPANTS IN DERIVATIVES MARKET

As equity markets developed, different categories of investors started participating in the market.
In India, equity market participants currently include retail investors, corporate investors, mutual
funds, banks, foreign institutional investors etc. Each of these investor categories uses the
derivatives market to as a part of risk management, investment strategy or speculation. Based on
the applications that derivatives are put to, these investors can be broadly classified into three
groups:
· Hedgers
· Speculators, and
· Arbitrageurs

Hedgers
These investors have a position (i.e., have bought stocks) in the underlying market but are
worried about a potential loss arising out of a change in the asset price in the future. Hedgers
participate in the derivatives market to lock the prices at which they will be able to transact in the
34
future. Thus, they try to avoid price risk through holding a position in the derivatives market.
Different hedgers take different positions in the derivatives market based on their exposure in the
underlying market. A hedger normally takes an opposite position in the derivatives market to
what he has in the underlying market.

Speculators
A Speculator is one who bets on the derivatives market based on his views on the
potential movement of the underlying stock price. Speculators take large, calculated risks as they
trade based on anticipated future price movements. They hope to make quick, large gains; but
may not always be successful. They normally have shorter holding time for their positions as
compared to hedgers. If the price of the underlying moves as per their expectation they can make
large profits. However, if the price moves in the opposite direction of their assessment, the losses
can also be enormous.

Arbitrageurs
Arbitrageurs attempt to profit from pricing inefficiencies in the market by making simultaneous
trades that offset each other and capture a risk-free profit. An arbitrageur may also seek to make
profit in case there is price discrepancy between the stock price in the cash and the derivatives
markets.

FUNCTION OF THE DERIVATIVE MARKETS

In spite of the fear and criticism with which the derivative markets are commonly looked at,
these markets perform a number of economic functions.

 Prices in an organized derivatives market reflect the perception of market participants

about the future and lead the price of underlying to the perceived future level. The prices
of derivatives converge with the prices of the underlying at the expiration of the derivate
contract. Thus derivatives help in discovery of future as well as current prices.
 Derivatives market helps to transfer risks from those who have them but may not like
them to those who have an appetite for them.
 Derivative due to their inherent nature, are linked to the underlying cash markets. With
the introduction of derivatives, the underlying market witness higher trading volumes
35
 because of participation by more players who would not otherwise participate for lack of
an arrangement to transfer risk.
 Speculative trades shift to a more controlled environment of derivatives market. In the
absence of an organized derivatives market, speculators trade in the underlying cash
markets. Margining, Monitoring and surveillance of the activities of various participants
become extremely difficult in these kinds of mixed markets.
 An important incidental benefit that flows from derivatives trading is that it acts as a
catalyst for new entrepreneurial activity. The derivatives have a history of attracting many
bright, creative, Well-educated people with an entrepreneurial attitude. They often
energize others to create new businesses, new products and new employment
opportunities, the benefit of which are immense.
 Derivatives trading acts as a catalyst for new entrepreneurial activity.
 Derivatives markets help increase saving and investment in long run

GLOBAL DERIVATIVES MARKET

The global financial centres such as Chicago, New York, Tokyo and London dominate the
trading in derivatives. Some of the world’s leading exchanges for the exchange-traded
derivatives are:
Chicago Mercantile exchange (CME) and London International Financial Futures
Exchange (LIFFE) (for currency & Interest rate futures)
Philadelphia Stock Exchange (PSE), London Stock Exchange (LSE) & Chicago Board
Options Exchange (CBOE) (for currency options)
 New York Stock Exchange (NYSE) and London Stock Exchange (LSE) (for equity
derivatives)
Chicago Mercantile Exchange (CME) and London Metal Exchange (LME) ( for
Commodities)These exchanges account for a large portion of the trading volume in the
respective derivatives segment.
ELIGIBILITY OF ANY STOCK TO ENTER IN DERIVATIVES MARKET
 Non Promoter holding (free float capitalization) not less than Rs.750 Crores from last 6
months
Daily Average Trading value not less than 5 Crores in last 6Months

36
At least 90%of Trading days in last 6 months
 Non Promoter Holding at least 30%

INTRODUCTION OF FUTURES CONTRACT

DIFINITION

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 the sense
that the former are standardized exchange-traded contracts.

FUTURES CONTRACT
Futures markets were designed to solve the problems that exist in forward markets. 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. But unlike forward contracts, the futures contracts are standardized
and exchange traded.
In simple words, Futures are exchange-traded contracts to buy or sell an asset in future at a price
agreed upon today. The asset can be share, index, interest rate, bond, rupee-dollar exchange rate,
sugar, crude oil, soybean, cotton, coffee etc.
To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of
the contract. It is a standardized contract with standard underlying instrument, a standard
quantity and quality of the underlying instrument that can be delivered, (or which can be used for
reference purposes in settlement) and a standard timing of such settlement. A futures contract
may be offset prior to maturity by entering into an equal and opposite transaction. More than
99% of futures transactions are offset this way.
The standardized items in a futures contract are:
 Quantity of the underlying asset
 Quality of the underlying assets (not required in case of financial futures)
 The date and the month of delivery
 The units of price quotation (not the price)

37
 Minimum fluctuation in price (tick size)
 Location of settlement
 Settlement style.

TRADING STOCKS AND INDEX FUTURES IN THE INDIAN STOCK MARKET

A future trading is a business that gives you everything you've ever wanted from a
business of your own. Roberts (1991) calls it the world's perfect business. It offers the potential
for unlimited earnings and real wealth. You can run it working at your own hours as well as
continuing to do whatever you're doing now.
You can operate this business entirely on your own, and can start with very little capital.
You won't have any employees, so you wouldn't need attorneys, accountants, or book keepers.
What’s more, you'd never have collection problems because you won't have any "customers,"
and since there is no competition, you won't have to pay the high cost of advertising. You also
won't need office space, warehousing, or a distribution system. All you need is a personal
computer and you can conduct your business from anywhere in the world.

HOW DOES FUTURES TRADING APPY TO INDIAN STOCKS AND INDICES

A future trading is a form of investment which involves speculating on the price of a security
going up or down in the future.
A security could be a stock (RIL, TISCO, etc.), stock index (NSE Nifty Index), commodity
(Gold, Silver, etc.), currency, etc.
Unlike other kinds of investments, such as stocks and bonds, when you trade futures, you do not
actually buy anything or own anything. You are speculating on the future direction of the price in
the security you are trading. This is like a bet on future price direction. The terms "buy" and
"sell" merely indicate the direction you expect future prices will take.
If, for instance, you were speculating on the NSE Nifty Index, you would buy a futures
contract if you thought the price would be going up in the future. You would sell a futures
contract if you thought the price would go down. For every trade, there is always a buyer and a

38
seller. Neither person has to own anything to participate. He must only deposit sufficient capital
with a brokerage firm to insure that he will be able to pay the losses if his trades lose money.

ADVANTAGES OF FUTURES TRADING IN INDIA:

1. High Leverage: The primary attraction, of course, is the potential for large profits in a short
period of time. The reason that futures trading can be so profitable is the high leverage. To ‘own’
a futures contract an investor only has to put up a small fraction of the value of the contract
(usually around 10-20%) as ‘margin’.
2. Profit in Both Bull & Bear Markets: In futures trading, it is as easy to sell (also referred to as
going short) as it is to buy (also referred to as going long). By choosing correctly, you can make
money whether prices go up or down.
3. Lower Transaction Cost: Another advantage of futures trading is much lower relative
commissions. Your commission for trading a futures contract is one tenth of a percent (0.10-
0.20%).
4. High Liquidity: Most futures markets are very liquid, i.e. there are huge amounts of contracts
traded every day. This ensures that market orders can be placed very quickly as there are always
buyers and sellers for most contracts.
5. Transparency and efficient price discovery. The market brings together divergent categories of
buyers and sellers.
6. Elimination of Counterparty credit risk.
7. Access to all types of market participants. (Currently, in the Foreign Exchange OTC market’s
one side of the transaction has to compulsorily be an Authorized Dealer – i.e. Bank).
8. Standardized products.
9. Transparent trading platform.

LIMITATIONS OF FUTURES

39
The benefit of standardization which often leads to improving liquidity in futures, works against
this product when a client needs to hedge a specific amount to a date for which there is no
standard contract

While margining and daily settlement is a prudent risk management policy, some clients may
prefer not to incur this cost in favour of OTC forwards, where collateral is usually not demanded.

USING FUTURES ON INDIVIDUAL SECURUTIES

Index futures began trading in India in June 2000. A year later, options on index were available
for trading. July 2001 saw the launch of options on individual securities (herein referred to as
stock options) and the onset of rolling settlement. With the launch of futures on individual
securities (herein referred to as stock futures) on the 9th of November, 2001, the basic range of
equity derivative products in India seems complete. Of the above mentioned products, stock
futures are particularly appealing due to familiarity and ease in understanding.
A purchase or sale of futures on a security gives the trader essentially the same price exposure as
a purchase or sale of the security itself. In this regard, trading stock futures is no different from
trading the security itself. Besides speculation, stock futures can be effectively used for hedging
and arbitrage reasons.
BASIC TERMINOLOGIES IN FUTURES MARKET
 Spot price: The price at which an asset trades in the spot market.
 Futures price: The price at which the futures contract trades in the futures
Market.
 Contract cycle: The period over which a contract trades. The index futures contracts on
the NSE have one-month, two-months and three-month expiry cycles which expire on the last
Thursday of the month. Thus a January expiration contract expires on the last Thursday of
January and a February expiration contract ceases trading on the last Thursday of February. On
the Friday following the last Thursday, a new contract having a three-month expiry is introduced
for trading.
 Expiry date: It is the date specified in the futures contract. This is the last day on which
the contract will be traded, at the end of which it will cease to exist.

40
 Contract size: The amount of asset that has to be delivered less than one contract. For
instance, the contract size on NSE’s futures market is 200 Nifty’s.
 Basis: In the context of financial futures, basis can be defined as the futures price minus
the spot price. There will be a different basis for each delivery month for each contract. In a
normal market, basis will be positive. This reflects that futures prices normally exceed spot
prices.
 Cost of carry: The relationship between futures prices and spot prices can be
summarized in terms of what is known as the cost of carry. This measures the storage cost plus
the interest that is paid to finance the asset less the income earned on the asset.
 Initial margin: The amount that must be deposited in the margin account at the time a
futures contract is first entered into is known as initial margin.
 Marking-to-market: In the futures market, at the end of each trading day, the margin
account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price.
This is called marking–to–market.
 Maintenance margin: This is somewhat lower than the initial margin. This is set to
ensure that the balance in the margin account never becomes negative. If the balance in the
margin account falls below the maintenance margin, the investor receives a margin call and is
expected to top up the margin account to the initial margin level before trading commences on
the next day.

INTRODUCTION TO OPTIONS
In this section, we look at the next derivative product to be traded on the NSE,namely options.
Options are fundamentally different from forward and futures contracts. An option gives the
holder of the option the right to do something. The holder does not have to exercise this right. In
contrast, in a forward or futures contract, the two parties have committed themselves to doing
something. Whereas it costs nothing (except margin requirement) to enter into a futures
contracts, the purchase of an option requires as up-front payment.

DEFINITION

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

HISTORY OF OPTIONS
Although options have existed for a long time, they we traded OTC, without much knowledge of
valuation. The first trading in options began in Europe and the US as early as the seventeenth
century. It was only in the early 1900s that a group of firms set up what was known as the put
and call Brokers and Dealers Association with the aim of providing a mechanism for bringing
buyers and sellers together. If someone wanted to buy an option, he or she would contact one of
the member firms. The firms would then attempt to find a seller or writer of the option either
from its own clients of those of other member firms. If no seller could be found, the firm would
undertake to write the option itself in return for a price. This market however suffered from two
deficiencies. First, there was no secondary market and second, there was no mechanism to
guarantee that the writer of the option would honour the contract. In 1973, Black, Merton and
Scholes invented the famed Black-Scholes formula. In April 1973, CBOE was set up specifically
for the purpose of trading options. The market for option developed so rapidly that by early’ 80s,
the number of shares underlying the option contract sold each day exceeded the daily volume of
shares traded on the NYSE. Since then ,there has been no looking back. Option made their first
major mark in financial history during the
Tulip-bulb mania in seventeenth-century Holland
. It was one of the most spectacular get rich quick brings in history. The first tulip was brought
Into Holland by a botany professor from Vienna. Over a decade, the tulip became the most
popular and expensive item in Dutch gardens. The more popular they became, the more Tulip
bulb prices began rising. That was when options came into the picture. They were initially used
for hedging. By purchasing a call option on tulip bulbs, a dealer who was committed to a sales
contract could be assured of obtaining a fixed number of bulbs for a set price. Similarly, tulip-
bulb growers could assure themselves of selling their bulbs at a set price by purchasing put
options. Later, however, options were increasingly used by speculators who found that call

42
options were an effective vehicle for obtaining maximum possible gains on investment. As long
as tulip prices continued to skyrocket, a call buyer would realize returns far in excess of those
that could be obtained by purchasing tulip bulbs themselves. The writers of the put options also
prospered as bulb prices spiralled since writers were able to keep the premiums and the options
were never exercised. The tulip-bulb market collapsed in 1636 and a lot of speculators lost huge
sums of money. Hardest hit were put writers who were unable to meet their commitments to
purchase Tulip bulbs.

PROPERTIES OF OPTION
Options have several unique properties that set them apart from other securities .The following
are the properties of option:
•Limited Loss
•High leverages potential
•Limited Life

PARTIES IN AN OPTION CONTRACT

There are two participants in Option Contract.
Buyer/Holder/Owner 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.
Seller/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.
TYPES OF OPTIONS
The Options are classified into various types on the basis of various variables. The following are
the various types of options

1. ON THE BASIS OF UNDERLYING ASSEST:

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

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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.

2. ON THE BASIS OF MARKET MOVEMENT:

On the basis of the market movements the option are divided into two types. They are:
Call Option:
A call Option gives the holder the right but not the obligation to buy an asset by acertain date for
a certain price. It is brought by an investor when he seems that thestock price moves upwards.
A 'call' confers on the (option) contract holder the right to buy an asset at a stated price on or
before a specified expiration date. A right to buy, not an obligation. The call owner always has
the option to let his option expire. (Of course, he then loses the initial money invested in buying
the contract.)
Call buyers are betting the underlying asset - the stock, bond, commodity, etc. - will increase in
price before the expiration date. And, not only rise, but rise enough to make a profit.
Put Option:
A put option gives the holder the right but not the obligation to sell an asset by acertain date for a
certain price. It is bought by an investor when he seems that the stock price moves downwards.
A 'put', by contrast, gives the option buyer the right to sell an asset at a certain price by a stated
date. Puts are similar to 'shorting stock', in this sense. Put buyers are betting the stock price will
fall before the option expires.
In this case the market price must fall below the strike price in order to garner a profit from
exercising the option. (Ignoring the cost of the put, for simplicity.) Under those circumstances,
the option holder is 'in the money'.
The put option is two types:
a. INDEX OPTION
b. INDIVIDUAL STOCK OPTION

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3. ON THE BASIS OF EXERCISE OF OPTION:
On the basis of the exercise of the Option, the options are classified into two Categories.
American Option:
American options are options that can be exercised at any time up to the expiration date. Most
exchange –traded options are American.

European Option:
European options are options that can be exercised only on the expiration date itself. European
options are easier to analyse than American options, and properties of an American option are
frequently deduced from those of its European counterpart

BASIC TERMINOLOGIES IN OPTIONS

Index options: These options have the index as the underlying. In India, they have a European
style settlement. Eg. Nifty options, Mini Nifty options etc.

Stock options: Stock options are options on individual stocks. A stock option contract gives
the holder the right to buy or sell the underlying shares at the specified price. They have an
American style settlement

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 / seller of an option: The writer / seller 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.

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

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Option seller. It is also referred to as the option premium.
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.
European options: European options are options that can be exercised only on the
Expiration date itself.
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 cashflow 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

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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.

OPTIONS PAYOFFS

The optionality characteristic of options results in a non-linear payoff for options. In simple
Words , it means that the losses for the buyer of an option are limited, however the profits
are potentially unlimited. For a writer (seller), the payoff is exactly the opposite. His profits
are limited to the option premium, however his losses are potentially unlimited. These nonlinear
Payoffs are fascinating as they lend themselves to be used to generate various payoffs by using
combinations of options and the underlying. We look here at the six basic payoffs (pay close
attention to these pay-offs, since all the strategies in the book are derived out of these basic
payoffs).

1.1 Payoff profile of buyer of asset: Long asset

In this basic position, an investor buys the underlying asset, ABC Ltd. shares for instance,
For Rs. 2220, and sells it at a future date at an unknown price, St. Once it is purchased, the
investor is said to be "long" the asset. Figure 1.1 shows the payoff for a long position on abc ltd

The figure shows the profits/losses from a long position on ABC Ltd. The investor bought ABC
Ltd. at Rs. 2220. If the share price goes up, he profits. If the share price falls he loses.

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1.2Payoff profile for seller of asset: Short asset

In this basic position, an investor shorts the underlying asset, ABC Ltd. shares for instance,
for Rs. 2220, and buys it back at a future date at an unknown price, St. Once it is sold, the
investor is said to be "short" the asset. Figure 1.2 shows the payoff for a short position on
ABC Ltd.
Payoff for investor who went Short ABC Ltd. at Rs. 2220
The figure shows the profits/losses from a short position on ABC Ltd. The investor sold ABC
Ltd.at Rs. 2220. If the share price falls, he profits. If the share price rises, he loses.

Payoff profile for buyer of call options: Long call

A call option gives the buyer the right to buy the underlying asset at the strike price

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Specified in the option. The profit/loss that the buyer makes on the option depends on the
ABC Ltd.
spot price of the underlying. If upon expiration, the spot price exceeds the strike price, he
makes a profit. Higher the spot price, more is the profit he makes. If the spot price of the
underlying is less than the strike price, he lets his option expire un-exercised. His loss in
this case is the premium he paid for buying the option. Figure 1.3 gives the payoff for the
buyer of a three month call option (often referred to as long call) with a strike of 2250
bought at a premium of 86.60.
The figure shows the profits/losses for the buyer of a three-month Nifty 2250 call option. As can
be seen, as the spot Nifty rises, the call option is in-the-money. If upon expiration, Nifty closes
above the strike of 2250, the buyer would exercise his option and profit to the extent of the
difference between the Nifty-close and the strike price. The profits possible on this option are
Potentially unlimited. However if Nifty falls below the strike of 2250, he lets the option expire.
His losses are limited to the extent of the premium he paid for buying the option.

1.4 Payoff profile for writer (seller) of call options: Short call

A call option gives the buyer the right to buy the underlying asset at the strike price
specified in the option. For selling the option, the writer of the option charges a premium.
The profit/loss that the buyer makes on the option depends on the spot price of the
underlying. Whatever is the buyer's profit is the seller's loss. If upon expiration, the spot
price exceeds the strike price, the buyer will exercise the option on the writer. Hence as the
spot price increases the writer of the option starts making losses. Higher the spot price,

49
more is the loss he makes. If upon expiration the spot price of the underlying is less than
the strike price, the buyer lets his option expire un-exercised and the writer gets to keep
the premium. Figure 1.4 gives the payoff for the writer of a three month call option (often
referred to as short call) with a strike of 2250 sold at a premium of 86.60.

The figure shows the profits/losses for the seller of a three-month Nifty 2250 call option. As the
spot Nifty rises, the call option is in-the-money and the writer starts making losses. If upon
expiration, Nifty closes above the strike of 2250, the buyer would exercise his option on the
writer
who would suffer a loss to the extent of the difference between the Nifty-close and the strike
price. The loss that can be incurred by the writer of the option is potentially unlimited, whereas
the maximum profit is limited to the extent of the up-front option premium of Rs.86.60 charged
by him.

1.5 Payoff profile for buyer of put options: Long put

A put option gives the buyer the right to sell the underlying asset at the strike price specified in
the Option. The profit/loss that the buyer makes on the option depends on the spot price of the
underlying. If upon expiration, the spot price is below the strike price, he makes a profit. Lower
the spot price, more is the profit he makes. If the spot price of the underlying is higher than the
strike price, he lets his option expire un-exercised. His loss in this case is the premium he paid
for buying the option. Figure 1.5 gives the payoff for the buyer of a three month put option (often
referred to as long put) with a strike of 2250 bought at a premium of 61.70.
The figure shows the profits/losses for the buyer of a three-month Nifty 2250 put option. As can
be seen, as the spot Nifty falls, the put option is in-the-money. If upon expiration, Nifty closes
below the strike of 2250, the buyer would exercise his option and profit to the extent of the
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difference between the strike price and Nifty-close. The profits possible on this option can be as
high as the strike price. However if Nifty rises above the strike of 2250, he lets the option expire.
His losses are limited to the extent of the premium he paid for buying the option.

1.6 Payoff profile for writer (seller) of put options: Short put

A put option gives the buyer the right to sell the underlying asset at the strike price specified in
the option. For selling the option, the writer of the option charges a premium. The
Profit/loss that the buyer makes on the option depends on the spot price of the underlying.
Whatever is the buyer's profit is the seller's loss. If upon expiration, the spot price happens to be
below the strike price, the buyer will exercise the option on the writer. If upon expiration the spot
price of the underlying is more than the strike price, the buyer lets his option un-exercised and
the writer gets to keep the premium. Figure 1.6 gives the payoff for the writer of a three month
put option (often referred to as short put) with a strike of 2250 sold at a premium of 61.70.

The figure shows the profits/losses for the seller of a three-month Nifty 2250 put option. As the
spot Nifty falls, the put option is in-the-money and the writer starts making losses. If upon
expiration, Nifty closes below the strike of 2250, the buyer would exercise his option on the
writer who would suffer a loss to the extent of the difference between the strike price and Nifty
close. The loss that can be incurred by the writer of the option is a maximum extent of the strike
price (Since the worst that can happen is that the asset price can fall to zero) whereas the

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maximum profit is limited to the extent of the up-front option premium of Rs.61.70 charged by
him.

SOME MORE OPTION STRATEGIES ARE:

STRATEGY 1: LONG CALL

For aggressive investors who are very bullish about the prospects for a stock / index, buying
Calls can be an excellent way to capture the upside potential with limited downside risk.

Buying a call is the most basic of all options strategies. It constitutes the first options trade for
someone already familiar with buying / selling stocks and would now want to trade options.
Buying a call is an easy strategy to understand. When you buy it means you are bullish. Buying a
Call means you are very bullish and expect the underlying stock /index to rise in future.
When to Use: Investor is very bullish on the stock / index.
Risk: Limited to the Premium. (Maximum loss if market expires at or below the option strike
price).
Reward: Unlimited Breakeven: Strike Price +Premium

STRATEGY 2: SHORT CALL

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When you buy a Call you are hoping that the underlying stock / index would rise. When you
expect the underlying stock / index to fall you do the opposite. When an investor is very bearish
about a stock / index and expects the prices to fall, he can sell Call options.
This position offers limited profit potential and the possibility of large losses on big advances in
underlying prices. Although easy to execute it is a risky strategy since the seller of the Call is
exposed to unlimited risk.

A Call option means an Option to buy. Buying a Call option means an investor expects the
underlying price of a stock / index to rise in future. Selling a Call option is just the opposite of
buying a Call option. Here the seller of the option feels the underlying price of a stock /index is
set to fall in the future.
When to use: Investor is very aggressive and he is very bearish about the stock /index. Risk:
Unlimited
Reward: Limited to the amount of premium
Break-even Point: Strike Price+ Premium

STRATEGY 3: SYNTHETIC LONG CALL: BUY

STOCK, BUY PUT

In this strategy, we purchase a stock since we feel bullish about it. But what if the price of
the stock went down. You wish you had some insurance against the price fall. So buy a Put
on the stock. This gives you the right to sell the stock at a certain price which is the strike
price. The strike price can be the price at which you bought the stock (ATM strike price) or
slightly below (OTM strike price).
In case the price of the stock rises you get the full benefit of the price rise. In case the price
of the stock falls, exercise the Put Option (remember Put is a right to sell). You have capped
your loss in this manner because the Put option stops your further losses. It is a strategy
with a limited loss and (after subtracting the Put premium) unlimited profit (from the stock
price rise). The result of this strategy looks like a Call Option Buy strategy and therefore is
called a Synthetic Call!
But the strategy is not Buy Call Option (Strategy 1). Here you have taken an exposure to an

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underlying stock with the aim of holding it and reaping the benefits of price rise, dividends,
bonus rights etc. and at the same time insuring against an adverse price movement.
In simple buying of a Call Option, there is no underlying position in the stock but is entered
into only to take advantage of price movement in the underlying stock.

When to use: When ownership is desired of stock yet investor is concerned about near-term
downside risk. The outlook is conservatively bullish.
Risk: Losses limited to Stock price + Put Premium– Put Strike price
Reward: Profit potential is unlimited.
Break-even Point: Put Strike Price + Put Premium+ Stock Price – Put Strike
Price

STRATEGY 4: LONG PUT

Buying a Put is the opposite of buying a Call. When you buy a Call you are bullish about the
stock / index. When an investor is bearish, he can buy a Put option. A Put Option gives the
buyer of the Put a right to sell the stock (to the Put seller) at a pre-specified price and
thereby limit his risk.
A long Put is a Bearish strategy. To take advantage of a falling market an investor can buy Put
options.
When to use: Investor is bearish about the stock /index.
Risk: Limited to the amount of Premium paid. (Maximum loss if stock / index expires or above
the option strike price).
Reward: Unlimited
Break-even Point :Stock Price – Premium

STRATEGY 5: SHORT PUT

Selling a Put is opposite of buying a Put. An investor buys Put when he is bearish on a

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stock. An investor Sells Put when he is Bullish about the stock – expects the stock price to
rise or stay sideways at the minimum. When you sell a Put, you earn a Premium (from the
buyer of the Put). You have sold someone the right to sell you the stock at the strike price.
If the stock price increases beyond the strike price, the short put position will make a profit
for the seller by the amount of the premium, since the buyer will not exercise the Put option
and the Put seller can retain the Premium (which is his maximum profit). But, if the stock
price decreases below the strike price, by more than the amount of the premium, the Put
seller will lose money. The potential loss being unlimited (until the stock price fall to zero).

When to Use: Investor is very Bullish on the stock / index. The main idea is to make a short
term income.
Risk: Put Strike Price –Put Premium.
Reward: Limited to the amount of Premium received.
Breakeven: Put Strike Price - Premium

STRATEGY 6: COVERED CALL

You own shares in a company which you feel may rise but not much in the near term (or at
best stay sideways). You would still like to earn an income from the shares. The covered call
is a strategy in which an investor Sells a Call option on a stock he owns (netting him a
premium). The Call Option which is sold in usually an OTM Call. The Call would not get
exercised unless the stock price increases above the strike price. Till then the investor in the
stock (Call seller) can retain the Premium with him. This becomes his income from the
stock. This strategy is usually adopted by a stock owner who is Neutral to moderately
Bullish about the stock.
An investor buys a stock or owns a stock which he feel is good for medium to long term but
is neutral or bearish for the near term. At the same time, the investor does not mind exiting
the stock at a certain price (target price). The investor can sell a Call Option at the strike
price at which he would be fine exiting the stock (OTM strike). By selling the Call Option the
investor earns a Premium. Now the position of the investor is that of a Call Seller who owns

55
the underlying stock. If the stock price stays at or below the strike price, the Call Buyer
(refer to Strategy 1) will not exercise the Call. The Premium is retained by the investor.
In case the stock price goes above the strike price, the Call buyer who has the right to buy
the stock at the strike price will exercise the Call option. The Call seller (the investor) who
has to sell the stock to the Call buyer, will sell the stock at the strike price. This was the
price which the Call seller (the investor) was anyway interested in exiting the stock and now
exits at that price. So besides the strike price which was the target price for selling the
stock, the Call seller (investor) also earns the Premium which becomes an additional gain
for him. This strategy is called as a Covered Call strategy because the Call sold is backed by
a stock owned by the Call Seller (investor). The income increases as the stock rises, but
gets capped after the stock reaches the strike price. Let us see an example to understand
the Covered Call strategy. Also earns the Premium which becomes an additional gain for him.

Reward: Limited to (Call Strike Price – Stock Price paid) + Premium received
Breakeven: Stock Price paid -Premium Received

STRATEGY 7: LONG COMBO: SELL A PUT, BUY A CALL

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 (lower strike) Put and
buying an OTM (higher strike) Call. This strategy simulates the action of
buying a stock (or
a futures) but at a fraction of the stock price. It is an inexpensive trade,
similar in pay-off to
Long Stock, except there is a gap between the strikes (please see the payoff
diagram). As
the stock price rises the strategy starts making profits. Let us try and
understand long
Combo with an example.

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When to Use: Investor is Bullish on the stock.
Risk: Unlimited (Lower Strike+ net debit)
Reward: Unlimited
Breakeven: Higher strike + net debit

STRATEGY 8: PROTECTIVE CALL /

SYNTHETIC LONG PUT

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. The net effect of this is that the investor creates a pay-off like a
Long Put, but instead of having a net debit (paying premium) for a Long Put, he creates a net
credit (receives money on shorting the stock). In case the stock price falls the investor gains in
the downward fall in the price. However, in case there is an unexpected rise in the price of the
stock the loss is limited. The pay-off from the Long Call will increase thereby compensating for
the loss in value of the short stock position. This strategy hedges the upside in the stock position
while retaining downside profit potential.

STRATEGY 9: 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. You do this strategy when you feel
the price of a stock / index is going to remain range bound or move down. Covered Put
writing involves a short in a stock / index along with a short Put on the options on the stock
/ index.
The Put that is sold is generally an OTM Put. The investor shorts a stock because he is
bearish about it, but does not mind buying it back once the price reaches (falls to) a target
price. This target price is the price at which the investor shorts the Put (Put strike price).
Selling a Put means, buying the stock at the strike price if exercised (Strategy no. 2). If the
stock falls below the Put strike, the investor will be exercised and will have to buy the stock

57
at the strike price (which is anyway his target price to repurchase the stock). The investor
makes a profit because he has shorted the stock and purchasing it at the strike price simply closes
the short stock position at a profit. And the investor keeps the Premium on the Put sold. The
investor is covered here because he shorted the stock in the first place.
If the stock price does not change, the investor gets to keep the Premium. He can use this
strategy as an income in a neutral market.

When to Use: If the investor is of the view that the markets are moderately bearish.
Risk: Unlimited if the price of the stock rises substantially
Reward: Maximum is (Sale Price of the Stock – Strike Price) + Put Premium
Breakeven: Sale Price of Stock + Put Premium

STRATEGY 10: 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, to take advantage of a movement in either direction, a
soaring or plummeting value of the stock / index. If the price of the stock
/ index increases, the call is exercised while the put expires worthless and if the price of the stock
/ index decreases, the put is exercised, the call expires worthless. Either way if the stock / index
shows volatility to cover the cost of the trade, profits are to be made. With
Straddles, the investor is direction neutral. All that he is looking out for is the stock / index to
break out exponentially in either direction.

When to Use: The investor thinks that the underlying stock / index will experience significant
volatility in the near term.
Risk: Limited to the initial premium paid.
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Reward: Unlimited
Breakeven:Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid
Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid

STRATEGY 11: 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. It creates a net income for the
investor. If the stock / index does not move much in either direction, the investor retains
the Premium as neither the Call nor the Put will be exercised. However, incase the stock /
index moves in either direction, up or down significantly, the investor’s losses can be
significant. So this is a risky strategy and should be carefully adopted and only when the
expected volatility in the market is limited. If the stock / index value stays close to the
strike price on expiry of the contracts, maximum gain, which is the Premium received is
made.

When to Use: The investor thinks that the underlying stock / index will experience very little
volatility in the near term.
Risk: Unlimited
Reward: Limited to the premium received
Breakeven: Upper Breakeven Point = Strike Price of Short Call + Net Premium Received
Lower Breakeven Point = Strike Price of Short Put - Net Premium Received

STRATEGY 12: 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

59
date. Here again the investor is directional neutral but is looking for an increased volatility
in the stock / index and the prices moving significantly in either direction. Since OTM
options are purchased for both Calls and Puts it makes the cost of executing a Strangle
cheaper as compared to a Straddle, where generally ATM strikes are purchased. Since the
initial cost of a Strangle is cheaper than a Straddle, the returns could potentially be higher.
However, for a Strangle to make money, it would require greater movement on the upside
or downside for the stock / index than it would for a Straddle. As with a Straddle, the
strategy has a limited downside (i.e. the Call and the Put premium) and unlimited upside
potential.

When to Use: The investor thinks that the underlying stock / index will experience very high
levels of volatility in the near term.
Risk: Limited to the initial premium paid
Reward: Unlimited
Breakeven: Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid
Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid
STRATEGY 13. 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. This strategy involves the simultaneous selling of a
slightly out-of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same
underlying stock and expiration date. This typically means that since OTM call and put are
sold, the net credit received by the seller is less as compared to a Short Straddle, but the
break even points are also widened. The underlying stock has to move significantly for the
Call and the Put to be worth exercising. If the underlying stock does not show much of a
movement, the seller of the Strangle gets to keep the Premium.

When to Use: This options trading strategy is taken when the options investor thinks that the
underlying stock will experience little volatility in the near term.

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Risk: Unlimited
Reward: Limited to the premium received
Breakeven: Upper Breakeven Point = Strike Price of Short Call + Net Premium Received
Lower Breakeven Point = Strike Price of Short Put - Net Premium Received

STRATEGY 14. COLLAR

A Collar is similar to Covered Call (Strategy 6) 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
(partly) the Put by selling a Call.
The put generally is ATM and the call is OTM having the same expiration month and must be
equal in number of shares. This is a low risk strategy since the Put prevents downside risk.
However, do not expect unlimited rewards since the Call prevents that. It is a strategy to be
adopted when the investor is conservatively bullish. The following example should make
Collar easier to understand.

When to Use: The collar is a good strategy to use if the investor is writing covered calls to earn
premiums but wishes to protect himself from an unexpected sharp drop in the price of the
underlying security.
Risk: Limited
Reward: Limited
Breakeven: Purchase Price of Underlying – Call Premium + Put Premium

STRATEGY 15. BULL CALL SPREAD STRATEGY:

BUY CALL OPTION, SELL CALL OPTION

A bull call spread is constructed by buying an in-the-money (ITM) call option, and selling
another out-of-the-money (OTM) call option. Often the call with the lower strike price will
be in-the-money while the Call with the higher strike price is out-of-the-money. Both calls

61
must have the same underlying security and expiration month.
The net effect of the strategy is to bring down the cost and breakeven on a Buy Call (Long
Call) Strategy. This strategy is exercised when investor is moderately bullish to bullish,
because the investor will make a profit only when the stock price / index rises. If the stock
price falls to the lower (bought) strike, the investor makes the maximum loss (cost of the
trade) and if the stock price rises to the higher (sold) strike, the investor makes the
maximum profit. Let us try and understand this with an example.

When to Use: Investor is moderately bullish.

Risk: Limited to any initial premium paid in establishing the position. Maximum loss occurs
where the underlying falls to the level of the lower or below.
Reward: Limited to the difference between the two strikes minus net premium cost. Maximum
profit occurs where the underlying rises to the level of the higher strike or above
Break-Even-Point (BEP): Strike Price of Purchased call+ Net Debit Paid

STRATEGY 16. BULL PUT SPREAD STRATEGY:SELL PUT OPTION, BUY PUT
OPTION
A bull put spread can be profitable when the stock / index is either range bound or rising.
The concept is to protect the downside of a Put sold by buying a lower strike Put, which acts
as an insurance for the Put sold. The lower strike Put purchased is further OTM than the
higher strike Put sold ensuring that the investor receives a net credit, because the Put
purchased (further OTM) is cheaper than the Put sold. This strategy is equivalent to the Bull
Call Spread but is done to earn a net credit (premium) and collect an income.
If the stock / index rises, both Puts expire worthless and the investor can retain the
Premium. If the stock / index falls, then the investor’s breakeven is the higher strike less
the net credit received. Provided the stock remains above that level, the investor makes a
profit. Otherwise he could make a loss. The maximum loss is the difference in strikes less
the net credit received. This strategy should be adopted when the stock / index trend is
upward or range bound. Let us understand this with an example.

When to Use: When the investor is moderately bullish.

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Risk: Limited. Maximum loss occurs where the underlying falls to the level of the lower strike
or below
Reward: Limited to the net premium credit. Maximum profit occurs where underlying rises to
the level of the higher strike or above.
Breakeven: Strike Price of Short Put - Net Premium Received

STRATEGY 17 : BEAR CALL SPREAD STRATEGY: SELL ITM CALL, BUY OTM
CALL
The Bear Call Spread strategy can be adopted when the investor feels that the stock / index
is either range bound or falling. The concept is to protect the downside of a Call Sold by
buying a Call of a higher strike price to insure the Call sold. In this strategy the investor
receives a net credit because the Call he buys is of a higher strike price than the Call sold.
The strategy requires the investor to buy out-of-the-money (OTM) call options while
Simultaneously selling in-the-money (ITM) call options on the same underlying stock index.
This strategy can also be done with both OTM calls with the Call purchased being higher
OTM strike than the Call sold. If the stock / index falls both Calls will expire worthless and
the investor can retain the net credit. If the stock / index rises then the breakeven is the
lower strike plus the net credit. Provided the stock remains below that level, the investor
makes a profit. Otherwise he could make a loss. The maximum loss is the difference in
strikes less the net credit received. Let us understand this with an example.

When to use: When the investor is mildly bearish on market.

Risk: Limited to the difference between the two strikes minus the net premium.
Reward: Limited to the net premium received for the position i.e., premium received for the
short call minus the premium paid for the long call.
Break Even Point:Lower Strike + Net credit

STRATEGY 18: BEAR PUT SPREAD STRATEGY:

BUY PUT, SELL PUT
This strategy requires the investor to buy an in-the-money (higher) put option and sell an
Out-of-the-money (lower) put option on the same stock with the same expiration date. This
Strategy creates a net debit for the investor. The net effect of the strategy is to bring down
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the cost and raise the breakeven on buying a Put (Long Put). The strategy needs a Bearish
Outlook since the investor will make money only when the stock k price / index falls. The
bought Puts will have the effect of capping the investor’s downside. While the Puts sold will
reduce the investors costs, risk and raise breakeven point (from Put exercise point of view).
If the stock price closes below the out-of-the-money (lower) put option strike price on the
expiration date, then the investor reaches maximum profits. If the stock price increases
above the in-the-money (higher) put option strike price at the expiration date, then the
investor has a maximum loss potential of the net debit.

When to use: When you are moderately bearish on market direction

Risk: Limited to the net amount paid for the spread. i.e. the premium paid for long position less
premium received for short position.
Reward: Limited to the difference between the two strike prices minus the net premium paid for
the position.
Break Even Point: Strike Price of Long Put – Net Premium Paid

STRATEGY 19: LONG CALL BUTTERFLY: SELL 2 ATM CALL OPTIONS, BUY 1 ITM
CALL OPTION AND BUY 1 OTM CALL OPTION.
A Long Call Butterfly is to be adopted when the investor is expecting very little movement in
the stock price / index. The investor is looking to gain from low volatility at a low cost. The
strategy offers a good risk / reward ratio, together with low cost. A long butterfly is similar
to a Short Straddle except your losses are limited. The strategy can be done by selling 2
ATM Calls, buying 1 ITM Call, and buying 1 OTM Call options (there should be equidistance
between the strike prices). The result is positive incase the stock / index remains range
bound. The maximum reward in this strategy is however restricted and takes place when
the stock / index is at the middle strike at expiration. The maximum losses are also limited.
Let us see an example to understand the strategy.

When to use: When the investor is neutral on market direction and bearish on volatility.
Risk Net debit paid.
Reward Difference between adjacent strikes minus net debit

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Break Even Point: Upper Breakeven Point = Strike Price of Higher Strike Long Call – Net
Premium Paid Lower Breakeven Point = Strike Price of Lower Strike Long Call + Net Premium
Paid

STRATEGY 20: SHORT CALL BUTTERFLY: BUY 2 ATM CALL OPTIONS, SELL 1
ITM CALL OPTION AND SELL 1 OTM CALL OPTION.
A Short Call Butterfly is a strategy for volatile markets. It is the opposite of Long Call
Butterfly, which is a range bound strategy. The Short Call Butterfly can be constructed by
Selling one lower striking in-the-money Call, buying two at-the-money Calls and selling
another higher strike out-of-the-money Call, giving the investor a net credit (therefore it is
an income strategy). There should be equal distance between each strike. The resulting
position will be profitable in case there is a big move in the stock / index. The maximum risk
occurs if the stock / index is at the middle strike at expiration. The maximum profit occurs if
the stock finishes on either side of the upper and lower strike prices at expiration. However,
this strategy offers very small returns when compared to straddles, strangles with only
slightly less risk. Let us understand this with an example.

When to use: You are neutral on market direction and bullish on volatility. Neutral means
that you expect the market to move in either direction -i.e. bullish and bearish.
Risk Limited to the net difference between the adjacent strikes (Rs. 100 in this example) less the
premium received for the position.
Reward Limited to the net premium received for the option spread.
Break Even Point: Upper Breakeven Point = Strike Price of Highest Strike Short Call – Net
Premium Received
Lower Breakeven Point =Strike Price of Lowest Strike Short Call + Net Premium Received

STRATEGY 21: LONG CALL CONDOR: BUY 1 ITM CALL OPTION (LOWER
STRIKE), SELL 1 ITM CALL OPTION (LOWER MIDDLE), SELL 1 OTM CALL
OPTION (HIGHER MIDDLE), BUY 1 OTM CALL
OPTION (HIGHER STRIKE)

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A Long Call Condor is very similar to a long butterfly strategy. The difference is that the two
middle sold options have different strikes. The profitable area of the pay off profile is wider
than that of the Long Butterfly (see pay-off diagram).
The strategy is suitable in a range bound market. The Long Call Condor involves buying 1
ITM Call (lower strike), selling 1 ITM Call (lower middle), selling 1 OTM call (higher middle)
and buying 1 OTM Call (higher strike). The long options at the outside strikes ensure that
the risk is capped on both the sides. The resulting position is profitable if the stock / index
remains range bound and shows very little volatility. The maximum profits occur if the stock
finishes between the middle strike prices at expiration. Let us understand this with an
example.

When to Use: When an investor believes that the underlying market will trade in a range with
low volatility until the options expire.
Risk Limited to the minimum of the difference between the lower strike call spread less the
higher call spread less the total premium paid for the condor.
Reward Limited. The maximum profit of a long condor will be realized when the stock is
trading between the two middle strike prices.
Break Even Point: Upper Breakeven Point =Highest Strike – Net Debit
Lower Breakeven Point =Lowest Strike + Net Debit

STRATEGY 22: SHORT CALL CONDOR : SHORT 1 ITM CALL OPTION (LOWER
STRIKE), LONG 1 ITM CALL OPTION (LOWER MIDDLE), LONG 1 OTM CALL
OPTION (HIGHER MIDDLE), SHORT 1 OTM CALL
OPTION (HIGHER STRIKE).

A Short Call Condor is very similar to a short butterfly strategy. The difference is that the two
middle bought options have different strikes. The strategy is suitable in a volatile market. The
Short Call Condor involves selling 1 ITM Call (lower strike), buying 1 ITM Call
(lower middle), buying 1 OTM call (higher middle) and selling 1 OTM Call (higher strike).

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The resulting position is profitable if the stock / index shows very high volatility and there is a
big move in the stock / index. The maximum profits occur if the stock / index finishes on either
side of the upper or lower strike prices at expiration. Let us understand this with an
example.
When to Use: When an investor believes that the market will break out of a trading range but is
not sure in which direction.
Risk Limited. The maximum loss of a short condor occurs at the centre of the option spread.
Reward Limited. The maximum profit of a short condor occurs when the underlying stock /
index is trading past the upper or lower strike prices.
Break Even Point: Upper Breakeven Point= Highest Strike – Net Credit
Lower Break Even Point= Lowest Strike + Net Credit

FACTORS AFFECTING THE PRICE OF AN OPTION

The following are the various factors that affect the price of an option they are:

Stock Price:

The pay-off from a call option is an amount by which the stock price exceeds the strike price.
Call options therefore become more valuable as the stock price increases and vice versa. The
pay-off from a put option is the amount; by which the strike price exceeds the stock price. Put
options therefore become more valuable as the stock price increases and vice versa.

Strike price: In case of a call, as a strike price increases, the stock price has to make a larger
upward move for the option to go in-the –money. Therefore, for a call, as the strike price
increases option becomes less valuable and as strike price decreases, option become more
valuable.

Time to expiration: Both put and call American options become more valuable as a time to
expiration increases.

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Volatility: The volatility of a stock price is measured of uncertain about future stock price
movements. As volatility increases, the chance that the stock will do very well or very poor
increases. The value of both calls and puts therefore increases as volatility increase.

Risk- free interest rate: The put option prices decline as the risk-free rate increases where as the
price of call always increases as the risk-free interest rate increases.

Dividends: Dividends have the effect of reducing the stock price on the X- dividend rate. This
has a negative effect on the value of call options and a positive effect on the value of put options.

EXCHANGE - TRADED VS. OVER THE COUNTER DERIVATIVES

Derivatives have probably been around for as long as people have been trading with one
another. Forward contracting dates back at least to the 12th century and well have been around
before then. Merchants entered into contracts with one another for future delivery of specified
amount of commodities at specified Price. A primary motivation for pre-arranging a buyer or
seller for a stock of commodities in early forward contracts was to lessen the possibility that
large swings would inhibit marketing the commodity after a harvest.
As the name suggests, derivatives that trade on an exchange are called exchange traded
derivatives, whereas privately negotiated derivative contracts are called OTC derivatives.

The OTC derivatives markets have witnessed rather sharp growth over the last few years which
have accompanied the modernization of commercial and investment banking and globalization
of financial activities. The recent developments in information technology have contributed to a
great extent to these developments. While both exchange-traded and OTC derivative contracts
offer many benefits, the former have rigid structures compared to the latter.

The OTC derivatives markets have the following features compared to exchange-traded
derivatives:
 The management of counter-party (credit) risk is decentralized and located within
individual institutions.
 There are no formal centralized limits on individual positions, leverage, or margining;
limits are determined as credit lines by each of the counterparties entering into these contracts.
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 There are no formal rules for risk and burden-sharing.
 There are no formal rules or mechanisms for ensuring market stability and integrity, and
for safeguarding the collective interests of market participants.
 Although OTC contracts are affected indirectly by national legal systems, banking
supervision and market surveillance, they are generally not regulated by a regulatory authority.

DISTINCTION BETWEEN FUTURES AND FORWARD CONTRACTS

Forward contracts are often confused with futures contracts. The confusion is primarily because
both serve essentially the same economic functions of allocating risk in the probability of future
price uncertainty. However futures have some distinct advantages over forward contracts as they
eliminate counterparty risk and offer more liquidity and price transparency. However, it should
be noted that forwards enjoy the benefit of being customized to meet specific client
requirements. The advantages and limitations of futures contracts are as follows:
RESEARCH DESIGN/ METHODOLOGY

RESEARCH OBJECTIVES

• To present a theoretical framework relating to Futures market in India

• To conduct a analysis on the performance of Stocks market

• To identify and develop buying and selling signals on selected stocks market

• To predict trend movements and also determine the timing of occurrence of trends.

• To observe the movements of price of the selected stocks.

RESEARCH METHODOLOGY

Research methods provide the specific details of how one accomplishes a research task
(procedures and methods).It provides specific and detailed procedures of how to initiate, carry
out, and complete a research task by mainly focusing on how to do it. Research methodology
deals with general approaches or guidelines to conducting research. It provides the principles for

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organizing, planning, designing, and conducting research, but it cannot tell you in detail how to
conduct a specific, individual research.

This research is completely based on long calendar spread used for analysing the stock of NSE.
Long calendar spreads provide a limited-risk way to take advantage of time decay inherent in
different expiration dates.

Option Greeks

The Greeks are risk measures that can help you choose which options to buy and which to sell.
With options trading you must have an idea of the direction of the underlying as well as a view
of the direction of implied volatility, and then factor in the timing.

The Greeks help you tailor your strategy to your outlook. Spreads, for instance, can help option
buyers reduce theta and Vega risk. Understanding the Greeks gives you even more of an edge in
this zero sum game of options trading. The option "greeks" come from the pricing model
(normally the Black-Scholes model) that gives us implied volatility and quantifies these factors.
Delta, theta, and vega are the greeks that most option buyers are most concerned with.

Delta
Delta is a measure that can be used in evaluating buying and selling opportunities. Delta is the
option's sensitivity to changes in the underlying stock price. It measures the expected price
change of the option given a $1 change in the underlying. Calls have positive deltas and puts
have negative deltas.

Theta
Theta is the option's sensitivity to time. It is a direct measure of time decay, giving us the dollar
decay per day. This amount increases rapidly, at least in terms of a percentage of the value of the
option, as the option approaches expiration. The greatest loss to time decay is in the last month of
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the options life. The more theta you have, the more risk you have if the underlying price does not
move in the direction that you want.
Option sellers use theta to their advantage, collecting time decay every day. The same is true of
credit spreads, which are really selling strategies. Calendar spreads involve buying a longer-
dated option and selling a nearer-dated option, taking advantage of the fact that options expire
faster as they approach expiration.

Vega
Vega is the option's sensitivity to changes in implied volatility. A rise in implied volatility is a
rise in option premiums, and so will increase the value of long calls and long puts. Vega
increases with each expiration further out in time.

Gamma
The gamma metric is the sensitivity of the delta to changes in price of the underlying asset.
Gamma measures the change in the delta for a $1 change in the underlying. This is really the rate
of change of the options price, and is most closely watched by those who sell options, as the
gamma gives an indication of potential risk exposure if the stock price moves against the
position.

Rho
Rho is the option's sensitivity to changes in interest rates. Most traders have little interest in this
measurement. An increase in interest rates decreases an options value because it costs more to
carry the position.

CALENDAR SPREAD:

Time decay can eat away at an option's value, especially as expiration gets closer. Options
positions can in fact profit from time decay, but this entails selling options and can involve

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significant risk. Long calendar spreads provide a limited-risk way to take advantage of time
decay inherent in different expiration dates.

Long calendar spreads profit within a given range. They profit from a rise in implied volatility
and are therefore a low-cost way of taking advantage of low implied volatility options. This is
considered a more advanced options strategy, but usually has lower risk and a better probability
of profit than outright call or put buying.
The maximum risk is known from the outset of the trade, and is equal to the debit paid for the
spread, up until the near-month option that you sell gets to expiration, at which point exposure
becomes the risk inherent in the option you buy.
Calendar spreads can be done with calls or puts and, if using the same
strikes, put and call calendar spreads are virtually equivalent. Implementing the strategy involves
buying one option and selling another option of the same type and strike, but with different
expiration. A long calendar spread would entail buying an option (not a "front month" contract)
and selling a nearer-expiration option of the same strike and type. Long calendar spreads are
traded for a debit, meaning you pay to open the overall position. If you are bullish, you would
buy a calendar call spread. If you are bearish, you would buy a calendar put spread.
This strategy profits in a limited range around the strike used. The trade can be set up with a
bullish, bearish or neutral bias. The greatest profit will come when the underlying is at the strike
used at expiration. Calendar spreads also profit from a rise in implied volatility, since the long
option has a higher vega than the short option.
Calendar spreads lose if the underlying moves too far in either direction. The maximum loss is
the debit paid, up until the option you sold expires. After that, you are long an option and your
further risk is the entire value of that option.
Options in nearer-month expirations have more time decay than later months (they have a higher
theta). The calendar spread profits from this difference in decay rates. This trade is best used
when implied volatility is low and when there is implied volatility "skew" between the months
used, specifically when the near-month sold has a higher implied volatility than the later-month
bought.
In this example, with the stock at 135.13, the September 135 call is purchased for $15.45, and the
July 135 call is sold for $10.45, for a net debit of $5, which is the maximum risk.

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This is a neutral trade used when the outlook is for a range-bound underlying. The maximum risk
is known from the outset of the trade, and is equal to the debit paid (until the first expiration). If
the implied volatility does not change, the position profits from roughly 121 to 154. Rises in
implied volatility will increase the profit and the range. Time decay is on your side with this
trade.

DATA COLLECTION

The data collection was focusing on secondary sources like websites of various trading
organizations. Since it is very difficult to obtain primary data for such a research, the research
was conducted on the basis of secondary data. The performance of Futures and Options for the
past five years were available in those websites and they are directly taken for analysis of this
project. The research was conducted based on the most reliable data available in internet which
ensures the least of mistakes and manipulation. In order to ensure accuracy it relied on trusted
web sites like www.nseindia.com for gathering the necessary data.
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Sources of data:

The main source of data is collected through websites of NSE to obtain the historical prices of
the stocks.

Also the other relevant data required for the purpose of the study was gathered from the various
websites, publications, magazines and reports prepared by research scholars

METHODS OF DATA COLLECTION

The research is purely based on secondary data

Secondary Data

Secondary data was collected by referring to following sources:

1. Anmol Shares Online publication

2. NSE websites

CHAPTER III
Data analysis

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Result discussion

 The main purpose of creating spread is trying to take the advantages of market movements
in both the ways
 Long calendar spread takes the advantages of time decay in options trading.
 It was a major observation in spread is that if the trader takes the advantages of initial days,
the premium movement is decent and one can consider booking significant profit.
 A long calendar spread is a good strategy useful when you expect prices to expire at the
value of the strike price you are trading at the expiry of the front-month option. This strategy
is ideal for a trader whose short-term sentiment is neutral. Ideally, the short-dated option will
expire out of the money. Once this happens, the trader is left with a long option position.

Trading Tips

There are a few trading tips to consider when trading calendar spreads.
Pick Expiration Months as for a Covered Call
When trading a calendar spread, try to think of this strategy as covered call. The only difference
is that you do not own the underlying stock, but you do own the right to purchase it.

By treating this trade like a covered call, it will help you pick expiration months quickly. When
selecting the expiration date of the long option, it is wise to go at least two to three months out.
This will depend largely on your forecast. However, when selecting the short strike, it is a good
practice to always sell the shortest dated option available. These options lose value the fastest,
and can be rolled out month-to-month over the life of the trade.

Leg Into a Calendar Spread:

For traders who own calls or puts against a stock, they can sell an option against this position
and "leg" into a calendar spread at any point. For example, if you own calls on a particular stock
and it has made a significant move to the upside but has recently levelled out, you can sell a call
against this stock if you are neutral over the short term. Traders can use this legging-in strategy
to ride out the dips in an upward trending stock.

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Plan to Manage Risk

The final trading tip is in regards to managing risk. Plan your position size around the max loss of
the trade and try to cut losses short when you have determined that the trade no longer falls within
the scope of your forecast.

What To Avoid

Like any trading strategy, it is important to know the risks and downsides involved.

Limited Upside in the Early Stages:

First and foremost, it is important to know that this trade has limited upside when both legs are
in play. However, once the short option expires, the remaining long position has unlimited profit
potential. It is important to remember that in the early stages of this trade, it is a neutral trading
strategy. If the stock starts to move more than anticipated, this is what can result in limited
gains.

Be Aware of Expiration Dates:

Speaking of expiration dates, this is another risk that needs to be planned for. As the expiration
date for the short option approaches, action needs to be taken. If the short option expires out of
the money, then the contract expires worthless. If the option is in the money, then the trader
should consider buying back the option at the market price. After the trader has taken action
with the short option, he or she can then decide whether to roll the position.

Time Your Entry Well:

The last risk to avoid when trading calendar spreads is an untimely entry. In general, market
timing is much less critical when trading spreads, but a trade that is very ill-timed can result in a
max loss very quickly. Therefore, it is important to survey the condition of the overall market
and to make sure you are trading within the direction of the underlying trend of the stock.

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Conclusion:

In summary, it is important to remember that a long calendar spread is a neutral - and in some
instances a directional - trading strategy that is used when a trader expects a gradual or sideways
movement in the short term and has more direction bias over the life of the longer-dated option.
This trade is constructed by selling a short-dated option and buying a longer-dated option,
resulting in a net debit. This spread can be created with either calls or puts, and therefore can be
a bullish or bearish strategy. The trader wants to see the short-dated option decay at a faster rate
than the longer-dated option.

When trading this strategy here are a few key points to remember:

Can be traded as either a bullish or bearish strategy

Generates profit as time decays
Risk is limited to the net debit
Benefits from an increase in volatility
If assigned, the trader loses the time value left in the position
Provides additional leverage in order to make excess returns
Losses are limited if the stock price moves dramatically

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Conclusion and recommendations

Conclusion:

 Anmol shares has enough number of employees and therefore it is a great advantage for the
company and the company also planning to expand its network
 Anmol shares also provides the facility of trading in almost all the exchanges and therefore
whatever the customer demands the company has in its package.
 The company also has a very good research team and this is meant for the better working as
well as for the customer of company only.
 The company also has the advantage of the existing customers where their level of faith and
their view about the company to the outside world will be a helping hand for the company to
expand its business.

Recommendation:

While working in the real time and while making this project many things came into scene, they are:

 Sales call made to new customers should be made promptly as immediate calling and
customer move to competitors easily.

 Services of ANMOL SHARES are available on all phones except on i-phones, which is in
trend now.

 ANMOL SHARES has tie-ups with all banks except SBI. This can be a reason why
customers move away.

 ANMOL SHARES should go for aggressive advertising, as most of its products and the
brand itself is not much advertised.

 ANMOL SHARES Should provide software training to their clients

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  Proper installation of PC & Mobile Software

 Company Should give required Research reports to client.

Limitation of the study:

 Total number of financial instrument in the market is so large that it needs a lot of resources
to analyse them all. There are various companies providing these financial instruments to the
public. Handling and analysing such a varied and diversified data needs a lot of time and
resources.
 As the project is based on secondary data, possibility of unauthorized information cannot be
avoided.
 The lack of knowledge in customers about the financial instruments can be a major
limitation.
 Time was limited so time constraint were also a limitation of the study.

Bibliography

Reference Books:

 “The technical analysis course”, fourth edition by Thomas A.Meyers.

Websites:

www.nseindia.com

www.wikipedia.com

www.investopedia.com

www.stockcharts.com

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