TABLE OF CONTENTS

CHAPTER

PAGE

Particulars of the Contents

1 2 3

2 4 33 42

Executive Summary Introduction Company profile Research Design

4 5 6 7

76

Analysis and Interpretation

95

Findings

96

Suggestions

8
9

97

Conclusions

98

Bibliography

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Executive Summary Derivative security or derivative is a contract which specifies the right or obligation between two parties to receive or deliver future cash flows (or exchange of other securities or assets) based on some future event. Another way of defining a derivative is that it is a security whose value is determined (derived) from one or more other securities, commodities, or events. The value is influenced by the features of the derivative contract, which may include the timing of the contract fulfillment, the value of the underlying security or commodity, and other factors such as volatility. The payments between the parties may be determined by the future changes of:

The price of some other, independently traded asset in the future (e.g., a common stock) The level of some index (e.g., a stock index or heating-degree-days) The occurrence of some well-specified event (e.g., a company defaulting)

Some derivatives are the right to buy or sell the underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves into the right Direction, the owner of the derivative makes money; otherwise, they lose money. Depending on the definition of the contract, the potential loss or gain may be much higher than if they had traded the underlying security or commodity directly.

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CLASSIFICATION OF DERIVATIVES: Derivatives are basically classified based upon the mechanism that is used to trade on them. They are: Over the Counter derivatives Exchange traded derivatives The OTC derivatives are between two private parties and are designed to suit the requirements of the parties concerned. The Exchange traded ones are standardized ones where the exchange sets the standards for trading by providing the contract specifications and the clearing corporation provides the trade guarantee and the settlement activities Common examples of derivatives are: Forward contracts Futures contracts Options such as stock options Swaps

Justification This study will provide cause and effect of volatility in options trading. It can be a yard stick for the share holder to take the advantage of differences in option pricing. It can also serve companies objective of providing accurate investment information to its investor.

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INTRODUCTION
Financial Market
We know that, money always flows from surplus sector to deficit sector. That means persons having excess of money lend it to those who need money to fulfill their requirement. Similarly, in business sectors the surplus money flows from the investors or lenders to the businessmen for the purpose of production or sale of goods and services. So, we find two different groups, one who invest money or lend money and the others, who borrow or use the money. Now you think, how these two groups meet and transact with each other. The financial markets act as a link between these two different groups. It facilitates this function by acting as an intermediary between the borrowers and lenders of money. So, financial market may be defined as a transmission mechanism between investors (or lenders) and the borrowers (or users) through which transfer of funds is facilitated. It consists of individual investors, financial institutions and other intermediaries who are linked by a formal trading rules and communication network for trading the various financial assets and credit instruments. Let us now see the main functions of financial market. (a) It provides facilities for interaction between the investors and the borrowers. (b) It provides pricing information resulting from the interaction between buyers and sellers in the market when they trade the financial assets. (c) It provides security to dealings in financial assets. (d) It ensures liquidity by providing a mechanism for an investor to sell the financial assets. (e) It ensures low cost of transactions and information.

MARKETS Types Of Financial Market

CIAL

A financial market consists of two major segments: (a) Money Market; and (b) Capital Market. While the money market deals in short-term credit, the capital market handles the medium term and long-term credit. Let us discuss these two types of markets in detail.3 KET

Money Market
The money market is a market for short-term funds, which deals in financial assets whose period of maturity is upto one year. It should be noted that money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of
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money. These instruments help the business units, other organisations and the Government to borrow the funds to meet their short-term requirement. Money market does not imply to any specific market place. Rather it refers to the whole networks of financial institutions dealing in short-term funds, which provides an outlet to lenders and a source of supply for such funds to borrowers. Most of the money market transactions are taken place on telephone, fax or Internet. The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialised financial institutions. The Reserve Bank of India is the leader of the money market in India. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market.

MONEY MARKET INSTRUMENTS

Following are some of the important money market instruments or securities. (a) Call Money: Call money is mainly used by the banks to meet their temporary requirement of cash. They borrow and lend money from each other normally on a daily basis. It is repayable on demand and its maturity period varies in between one day to a fortnight. The rate of interest paid on call money loan is known as call rate. (b) Treasury Bill: A treasury bill is a promissory note issued by the RBI to meet the short-term requirement of funds. Treasury bills are highly liquid instruments, that means, at any time the holder of treasury bills can transfer of or get it discounted from RBI. These bills are normally issued at a price less than their face value; and redeemed at face value. So the difference between the issue price and the face value of the treasury bill represents the interest on the investment. These bills are secured instruments and are issued for a period of not exceeding 364 days. Banks, Financial institutions and corporations normally play major role in the Treasury bill market.

(c) Commercial Paper: Commercial paper (CP) is a popular instrument for financing working capital requirements of companies. The CP is an unsecured instrument issued in the form of promissory note. This instrument was introduced in 1990 to enable the corporate borrowers to raise short-term funds. It can be issued for period ranging from 15 days to one year. Commercial papers are transferable by endorsement and delivery. The highly reputed companies (Blue Chip companies) are the major player of commercial paper market. (d) Certificate of Deposit: Certificate of Deposit (CDs) are short-term instruments issued by Commercial Banks and Special Financial Institutions (SFIs), which are freely transferable from one party to another. The maturity period of CDs ranges from 91 days to one year. These can be issued to individuals, co-operatives and companies.

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(e) Trade Bill: Normally the traders buy goods from the wholesalers or manufactures on credit. The sellers get payment after the end of the credit period. But if any seller does not want to wait or in immediate need of money he/she can draw a bill of exchange in favour of the buyer. When buyer accepts the bill it becomes a negotiable instrument and is termed as bill of exchange or trade bill. This trade bill can now be discounted with a bank before its maturity. On maturity the bank gets the payment from the drawee i.e., the buyer of goods. When trade bills are accepted by Commercial Banks it is known as Commercial Bills. So trade bill is an instrument, which enables the drawer of the bill to get funds for short period to meet the working capital needs.

Capital Market
Capital Market may be defined as a market dealing in medium and long-term funds. It is an institutional arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of securities. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc. In the present chapter let us discuss about the market for trading of securities. The market where securities are traded known as Securities market. It consists of two different segments namely primary and secondary market. The primary market deals with new or fresh issue of securities and is, therefore, also known as new issue market; whereas the secondary market provides a place for purchase and sale of existing securities and is often termed as stock market or stock exchange.

PRIMARY MARKET
The Primary Market consists of arrangements, which facilitate the procurement of long-term funds by companies by making fresh issue of shares and debentures. You know that companies make fresh issue of shares and/or debentures at their formation stage and, if necessary, subsequently for the expansion of business. It is usually done through private placement to friends, relatives and financial institutions or by making public issue. In any case, the companies have to follow a well-established legal procedure and involve a number of intermediaries such as underwriters, brokers, etc. who form an integral part of the primary market. You must have learnt about many initial public offers (IPOs) made recently by a number of public sector undertakings such as ONGC, GAIL, NTPC and the private sector companies like Tata Consultancy Services (TCS), Biocon, Jet-Airways and so on. SECONDARY MARKET The secondary market known as stock market or stock exchange plays an equally important role
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in mobilising long-term funds by providing the necessary liquidity to holdings in shares and debentures. It provides a place where these securities can be encashed without any difficulty and delay. It is an organised market where shares, and debentures are traded regularly with high degree of transparency and security. In fact, an active secondary market facilitates the growth of primary market as the investors in the primary market are assured of a continuous market for liquidity of their holdings. The major players in the primary market are merchant bankers, mutual funds, financial institutions, and the individual investors; and in the secondary market you have all these and the stockbrokers who are members of the stock exchange who facilitate the trading.

Indian Stock Exchange

The first organised stock exchange in India was started in Mumbai known as Bombay Stock Exchange (BSE). It was followed by Ahmedabad Stock Exchange in 1894 and Kolkata Stock Exchange in 1908. The number of stock exchanges in India went upto 7 by 1939 and it increased to 21 by 1945 on account of heavy speculation activity during Second World War. A number of unorganised stock exchanges also functioned in the country without any formal set-up and were known as kerb market. The Security Contracts (Regulation) Act was passed in 1956 for recognition and regulation of Stock Exchanges in India. At present we have 23 stock exchanges in the country. Of these, the most prominent stock exchange that came up is National Stock Exchange (NSE). It is also based in Mumbai and was promoted by the leading financial institutions in India. It was incorporated in 1992 and commenced operations in 1994. This stock exchange has a corporate structure, fully automated screen-based trading and nation-wide coverage. Another stock exchange that needs special mention is Over The Counter Exchange of India (OTCEI). It was also promoted by the financial institutions like UTI, ICICI, IDBI, IFCI, LIC etc. in September 1992 specially to cater to small and medium sized companies with equity capital of more than Rs.30 lakh and less than Rs.25 crore. It helps entrepreneurs in raising finances for their new projects in a cost effective manner. It provides for nation-wide online ringless trading with 20 plus representative offices in all major cities of the country. On this stock exchange, securities of those companies can be traded which are exclusively listed on OTCEI only. In addition, certain shares and debentures listed with other stock exchanges in India and the units of UTI and other mutual funds are also allowed to be traded on OTCEI as permitted securities. It has been noticed that, of late, the turnover at this stock exchange has considerably reduced and steps have been afoot to revitalise it. In fact, as of now, BSE and NSE are the two Stock Exchanges, which enjoy nation-wide coverage and handle most of the business in securities in the country.

Role Of SEBI
As part of economic reforms programme started in June 1991, the Government of India initiated several capital market reforms, which included the abolition of the office of the Controller of Capital
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Issues (CCI) and granting statutory recognition to Securities Exchange Board of India (SEBI) in 1992 for:

(a) protecting the interest of investors in securities; (b) promoting the development of securities market; (c) regulating the securities market; and (d) matters connected there with or incidental thereto. SEBI has been vested with necessary powers concerning various aspects of capital market such as:
1. Regulating the business in stock exchanges and any other securities market
2. Registering and regulating the working of various intermediaries and mutual funds

3. Promoting and regulating self regulatory organizations; 4. promoting investors education and training of intermediaries; 5. Prohibiting insider trading and unfair trade practices; 6. Regulating substantial acquisition of shares and takeover of companies; 7. Calling for information, undertaking inspection, conducting inquiries and audit of stock exchanges, and intermediaries and self regulation organizations in the stock market; and
8. Performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act, 1947 and the Securities Contracts (Regulation) Act, 1956 as may be delegated to it by the Central Government.

DERIVATIVES
Derivative security or derivative is a contract which specifies the right or obligation between two parties to receive or deliver future cash flows (or exchange of other securities or assets) based on some future event.

Another way of defining a derivative is that it is a security whose value is determined (derived) from one or more other securities, commodities, or events. The value is influenced by the features of the derivative contract, which may include the timing of the contract fulfillment, the value of the underlying security or commodity, and other factors such as volatility.

The payments between the parties may be determined by the future changes of: The price of some other, independently traded asset in the future (e.g., a Common stock)
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 The level of some index (e.g., a stock index or heating-degree-days) The occurrence of some well-specified event (e.g., a company defaulting)

Some derivatives are the right to buy or sell the underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves into the right direction, the owner of the derivative makes money; otherwise, they lose money. Depending on the definition of the contract, the potential loss or gain may be much higher than if they had traded the underlying security or commodity directly.

Types of derivative are:1. Forward 2. Future 3. Options 4. Swap

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INDIAN CAPITAL MARKET

The function of the financial market is to facilitate the transfer of funds from surplus sectors (lenders) to deficit sector (borrowers). Normally, household has excess of funds or savings, which they lend to borrowers in the corporate and public sector whose requirement of funds far exceeds their savings. A financial market consists of investors or buyers, sellers, dealers and does not refer to a physical location. As elsewhere in the world, the Indian financial system consists of the money market and capital market. The capital market consists of primary market and secondary market segments. The primary market deals with the issue of new instruments by the corporate sector such as equity shares, preference shares and debentures. The public sector consisting of central and state governments, various public sector industrial units (PSUs), statutory and other authorities such as state electricity boards and port trust also issue bonds. The primary market in which public issue of securities is made through a prospectus is a retail market and there is no physical location. Direct mailing, advertisements and brokers reach the investors. Screen based trading eliminates the need of trading floor. The secondary market or stock exchange where existing securities are traded is an auction arena. Since 1995, trading in securities is screen based. Screen based trading has also made an appearance in India. The secondary markets consist of 23 stock exchanges including the NSE and OTCEI and Inter Connected Stock Exchanges of India ltd. The secondary market

provides a trading place for the securities already issued to be bought and sold. It also provides liquidity to the initial buyers in the primary market to re-offer the securities to any interested buyer at a price, if mutually accepted. An active secondary market actually promotes the growth of the primary market and capital formation because investors in the primary market are assured of a continuous market and they can liquidate their investments in the stock exchange.

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NSE India
The National Stock Exchange (NSE) (Hindi: Rashtriya hare Bzar) is a stock exchange located at Mumbai, India. It is the 9th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading. NSE has a market capitalization of around US$1.59 trillion and over 1,552 listings as of December 2010. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India and between them are responsible for the vast majority of share transactions. The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange fifty), an index of fifty major stocks weighted by market capitalization. NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across India. NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%.

Origins
The National Stock Exchange of India was promoted by leading financial institutions at the behest of the Government of India, and was incorporated in November 1992 as a tax-paying company. In April 1993, it was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital market (Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivatives segment commenced in June 2000.

Innovations
NSE pioneering efforts include:

Being the first national, anonymous, electronic limit order book (LOB) exchange to trade securities in India. Since the success of the NSE, existent market and new market structures have followed the "NSE" model. Setting up the first clearing corporation "National Securities Clearing Corporation Ltd." in India. NSCCL was a landmark in providing innovation on all spot equity market (and later, derivatives market) trades in India.
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Co-promoting and setting up of National Securities Depository Limited, first depository in India Setting up of S&P CNX Nifty. NSE pioneered commencement of Internet Trading in February 2000, which led to the wide popularization of the NSE in the broker community. Being the first exchange that, in 1996, proposed exchange traded derivatives, particularly on an equity index, in India. After four years of policy and regulatory debate and formulation, the NSE was permitted to start trading equity derivatives Being the first and the only exchange to trade GOLD ETFs (exchange traded funds) in India. NSE has also launched the NSE-CNBC-TV18 media centre in association with CNBCTV18. NSE.IT Limited, setup in 1999, is a 100% subsidiary of the National Stock Exchange of India. A Vertical Specialist Enterprise, NSE.IT offers end-to-end Information Technology (IT) products, solutions and services. NSE (National Stock Exchange) was the first exchange in the world to use satellite communication technology for trading, using a client server based system called National Exchange for Automated Trading (NEAT). For all trades entered into NEAT system, there is uniform response time of less than one second.

Markets
Currently, NSE has the following major segments of the capital market:

Equity Futures and Options Retail Debt Market Wholesale Debt Market Currency futures MUTUAL FUND STOCKS LENDING & BORROWING

August 2008 Currency derivatives were introduced in India with the launch of Currency Futures in USD INR by NSE. Currently it has also launched currency futures in EURO, POUND & YEN. Interest Rate Futures was introduced for the first time in India by NSE on 31 August 2009, exactly after one year of the launch of Currency Futures. NSE became the first stock exchange to get approval for Interest rate futures as recommended by SEBI-RBI committee, on 31 August 2009, a futures contract based on 7% 10 Year GOI bond (NOTIONAL) was launched with quarterly maturities.

Working Hours

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NSE's normal trading sessions are conducted from 9:15 am India Time to 3:30 pm India Time on all days of the week except Saturdays, Sundays and Official Holidays declared by the Exchange (or by the Government of India) in advance. The exchange, in association with BSE (Bombay Stock Exchange Ltd.), is thinking of revising its timings from 9.00 am India Time to 5.00 pm India Time. There were System Testing going on and opinions, suggestions or feedback on the New Proposed Timings are being invited from the brokers across India. And finally on 18 November 2009 regulator decided to drop their ambitious goal of longest Asia Trading Hours due to strong opposition from its members. On 16 December 2009, NSE announced that it would advance the market opening to 9:00 am from 18 December 2009. So NSE trading hours will be from 9.00 am till 3:30 pm India Time. However, on 17 December 2009, after strong protests from brokers, the Exchange decided to postpone the change in trading hours till 4 Jan 2010. NSE new market timing from 4 Jan 2010 is 9:00 am till 3:30 pm India Time.

Derivative Products in NSE S&P CNX Nifty : Futures | Options Mini derivative contracts : Futures | Options CNXIT : Futures | Options BANK Nifty : Futures | Options Nifty Midcap 50 : Futures | Options Individual Securities : Futures | Options

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NSE Group

NSCCL

NCCL

NSETECH

DotEx Intl. Ltd. IISL NSE.IT

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NSE Milestones

November 1992 April 1993 May 1993 June 1994 November 1994 March 1995 April 1995 June 1995 July 1995 October 1995 April 1996 April 1996 June 1996 November 1996 November 1996 December 1996 December 1996 December 1996 February 1997 November 1997 May 1998 May 1998
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Incorporation Recognition as a stock exchange Formulation of business plan Wholesale Debt Market segment goes live Capital Market (Equities) segment goes live Establishment of Investor Grievance Cell Establishment of NSCCL, the first Clearing Corporation Introduction of centralized insurance cover for all trading members Establishment of Investor Protection Fund Became largest stock exchange in the country Commencement of clearing and settlement by NSCCL Launch of S&P CNX Nifty Establishment of Settlement Guarantee Fund Setting up of National Securities Depository Limited, first depository in India, co-promoted by NSE Best IT Usage award by Computer Society of India Commencement of trading/settlement in dematerialized securities Dataquest award for Top IT User Launch of CNX Nifty Junior Regional clearing facility goes live Best IT Usage award by Computer Society of India Promotion of joint venture, India Index Services & Products Limited (IISL) Launch of NSE's Web-site: www.nse.co.in
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July 1998 August 1998 February 1999 April 1999 October 1999 January 2000 February 2000 June 2000 September 2000 November 2000 December 2000 June 2001 July 2001 November 2001 December 2001 January 2002 May 2002 October 2002 January 2003 June 2003 August 2003 June 2004 August 2004 March 2005 June 2005 December 2006 January 2007 March 2007 June 2007 October 2007
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Launch of NSE's Certification Programme in Financial Market CYBER CORPORATE OF THE YEAR 1998 award Launch of Automated Lending and Borrowing Mechanism CHIP Web Award by CHIP magazine Setting up of NSE.IT Launch of NSE Research Initiative Commencement of Internet Trading Commencement of Derivatives Trading (Index Futures) Launch of 'Zero Coupon Yield Curve' Launch of Broker Plaza by Dotex International, a joint venture between NSE.IT Ltd. and I-flex Solutions Ltd. Commencement of WAP trading Commencement of trading in Index Options Commencement of trading in Options on Individual Securities Commencement of trading in Futures on Individual Securities Launch of NSE VaR for Government Securities Launch of Exchange Traded Funds (ETFs) NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category Launch of NSE Government Securities Index Commencement of trading in Retail Debt Market Launch of Interest Rate Futures Launch of Futures & options in CNXIT Index Launch of STP Interoperability Launch of NSEs electronic interface for listed companies India Innovation Award by EMPI Business School, New Delhi Launch of Futures & options in BANK Nifty Index 'Derivative Exchange of the Year', by Asia Risk magazine Launch of NSE CNBC TV 18 media centre NSE, CRISIL announce launch of IndiaBondWatch.com NSE launches derivatives on Nifty Junior & CNX 100 NSE launches derivatives on Nifty Midcap 50
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January 2008 March 2008 April 2008 April 2008 August 2008 August 2009 November 2009 December 2009 February 2010 March 2010 April 2010 July 19, 2010 July 19, 2010 July 28, 2010 October 12, 2010 October 28, 2010 October 29, 2010 November 9, 2010

Introduction of Mini Nifty derivative contracts on 1st January 2008 Introduction of long term option contracts on S&P CNX Nifty Index Launch of India VIX Launch of Securities Lending & Borrowing Scheme Launch of Currency Derivatives Launch of Interest Rate Futures Launch of Mutual Fund Service System Commencement of settlement of corporate bonds Launch of Currency Futures on additional currency pairs NSE- CME Group & NSE - SGX product cross listing agreement Financial Derivative Exchange of the Year Award' by Asian Banker Commencement of trading of S&P CNX Nifty Futures on CME Real Time dissemination of India VIX. LOI signed with London Stock Exchange Group Introduction of Call auction in Pre-open session Introduction of European Style Stock Options Introduction of Currency Options on USD INR Launch of mobile trading for all investors

December 29, 2010 NSCCL Rated CCR AAA for third consecutive year January 05, 2011 NSE receives Financial Inclusion Award

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Technology Used By NSE

Across the globe, developments in information, communication and network technologies have created paradigm shifts in the securities market operations. Technology has enabled organizations to build new sources of competitive advantage, bring about innovations in products and services, and to provide for new business opportunities. Stock exchanges all over the world have realized the potential of IT and have moved over to electronic trading systems, which are cheaper, have wider reach and provide a better mechanism for trade and post trade execution. NSE believes that technology will continue to provide the necessary impetus for the organisation to retain its competitive edge and ensure timeliness and satisfaction in customer service. In recognition of the fact that technology will continue to redefine the shape of the securities industry, NSE stresses on innovation and sustained investment in technology to remain ahead of competition. NSE's IT set-up is the largest by any company in India. It uses satellite communication technology to energize participation from around 200 cities spread all over the country. In the recent past, capacity enhancement measures were taken up in regard to the trading systems so as to effectively meet the requirements of increased users and associated trading loads. With upgradtion of trading hardware, NSE today can handle up to 15 million trades per day in Capital Market segment. In order to capitalize on in-house expertise in technology, NSE set up a separate company, NSE InfoTech Services Ltd. which provides a platform for taking up all IT related assignments of NSE. NEAT is a state-of-the-art client server based application. At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. The trading server software runs on OpenVOS based fault tolerant STRATUS main frame computer hosted on the Intel Platform while the client software runs on Microsoft Windows Platform. Between the NEAT client and server there is another layer called the Trading Access Point (TAP). TAP facilitates IT Infrastructure consolidation and routes the orders and trades between Client and Server in an optimized protocol. Each trading member trades on the NSE with other members through a PC located in the trading member's office. The trading members on the various market segments such as CM, F&O, WDM, Currency Derivatives, SLBM, MF and IPO are linked to the central computer at the NSE through dedicated leased lines and VSAT terminals. The telecommunications network is the backbone of the automated trading system has been upgraded to use the more popular and modern IP Protocol which was using X.25 protocol earlier. NSE is one of the largest interactive VSAT based stock exchanges in the world. Today it supports more than 2500 VSATs and 3000 leased lines across the country. The NSE- network is the largest private wide area network in the country and the first extended C- Band VSAT network in the world. Currently more than 10000 users are trading on the real time-online NSE application. The Exchange uses powerful UNIX servers, procured from HP for the back office processing. The latest software platforms like ORACLE RDBMS, SQL/ORACLE FORMS Front - Ends, etc. have
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been used for the Exchange applications. The Exchange currently manages its data centre operations, system and database administration, design and development of in-house systems and design and implementation of telecommunication solutions. There are over 500 server class computer systems which include non-stop fault-tolerant Stratus servers and high end UNIX servers, operational under one roof to support the NSE applications. This coupled with the nationwide VSAT network makes NSE the country's largest Information Technology user. In an ongoing effort to improve NSE's infrastructure, a corporate network has been implemented, connecting all the offices at Mumbai, Delhi, Calcutta and Chennai. This corporate network enables speedy inter-office communications and data and voice connectivity between offices. NSE has its online presence at www.nseindia.com. The website displays its live stock quotes which are updated online and corporate announcements. The website has been designed to cater to the needs of Investors, Members, Issuers and other market participants. NSE today allows members to provide internet trading facility to their clients through the use of NOW (NSE on web), a shared web infrastructure.

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Risk Management Through Margins

Margins NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and margining system. The actual margining and position monitoring is done on-line, on an intra-day basis. NSCCL uses the SPAN (Standard Portfolio Analysis of Risk) system for the purpose of margining, which is a portfolio based system.

Initial Margin a. Span Margin NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPAN. A CM is in turn required to collect the initial margin from the TMs and his respective clients. Similarly, a TM should collect upfront margins from his clients. Initial margin requirements are based on 99% value at risk over a one day time horizon. However, in the case of futures contracts (on index or individual securities), where it may not be possible to collect mark to market settlement value, before the commencement of trading on the next day, the initial margin is computed over a two-day time horizon, applying the appropriate statistical formula. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time. Initial margin requirement for a member:

For client positions - is netted at the level of individual client and grossed across all clients, at the Trading/ Clearing Member level, without any setoffs between clients. For proprietary positions - is netted at Trading/ Clearing Member level without
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any setoffs between client and proprietary positions.

For the purpose of SPAN Margin, various parameters are specified from time to time. In case a trading member wishes to take additional trading positions his CM is required to provide Additional Base Capital (ABC) to NSCCL. ABC can be provided by the members in the form of Cash, Bank Guarantee, Fixed Deposit Receipts and approved securities.

b. Premium Margin In addition to Span Margin, Premium Margin is charged to members. The premium margin is the client wise premium amount payable by the buyer of the option and is levied till the completion of pay-in towards the premium settlement.

c. Assignment Margin Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. It is levied on assigned positions of CMs towards interim and final exercise settlement obligations for option contracts on index and individual securities till the payin towards exercise settlement is complete. The Assignment Margin is the net exercise settlement value payable by a Clearing Member towards interim and final exercise settlement and is deducted from the effective deposits of the Clearing Member available towards margins. Assignment margin is released to the CMs for exercise settlement pay-in. Initial Margin requirement = Total SPAN Margin Requirement + Buy Premium + Assignment Margin Exposure Margin The exposure margins for options and futures contracts on index are as follows: i. For Index options and Index futures contracts: 3% of the notional value of a futures contract. In case of options it is charged only on short positions and is 3% of the notional value of open positions. ii. For option contracts and Futures Contract on individual Securities: The higher of 5% or 1.5 standard deviation of the notional value of gross open position in futures on individual securities and gross short open positions in options on individual securities in a particular underlying. The standard deviation of daily logarithmic returns of prices in the underlying stock in the cash market in the last six months is computed on a rolling and monthly basis at the end of each month. For this purpose notional value means: - For a futures contract the contract value at last traded price/ closing price.
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- For an options contract the value of an equivalent number of shares as conveyed by the options contract, in the underlying market, based on the last available closing price. In case of calendar spread positions in futures contract, exposure margins are levied on one third of the value of open position of the far month futures contract. The calendar spread position is granted calendar spread treatment till the expiry of the near month contract. .

Clearing & Settlement (Derivatives)

National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all deals executed on the Derivatives (Futures & Options) segment. NSCCL acts as legal counter-party to all deals on NSE's F&O segment and guarantees settlement. A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all deals executed by Trading Members (TM) on NSE, who clear and settle such deals through them.

Clearing Members A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all deals executed by Trading Members (TM) on NSE, who clear and settle such deals through them. Primarily, the CM performs the following functions: 1. Clearing Computing obligations of all his TM's i.e. determining positions to settle. 2. Settlement - Performing actual settlement. Only funds settlement is allowed at present in Index as well as Stock futures and options contracts 3. Risk Management Setting position limits based on upfront deposits / margins for each TM and monitoring positions on a continuous basis.

Types of Clearing Members

Trading Member Clearing Member (TM-CM) A Clearing Member who is also a TM. Such CMs may clear and settle their own proprietary trades, their clients trades as well as trades of other TMs & Custodial Participants Professional Clearing Member (PCM) A CM who is not a TM. Typically banks or custodians could become a PCM and clear and settle for TMs as well as of the Custodial Participants Self Clearing Member (SCM) A Clearing Member who is also a TM. Such CMs may clear and settle only their own proprietary trades and their clients trades but cannot clear and settle trades of other TMs.

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Clearing Member Eligibility Norms

Net worth of at least Rs.300 lakhs. The net worth requirement for a CM who clears and settles only deals executed by him is Rs. 100 lakhs. Deposit of Rs. 50 lakhs to NSCCL which forms part of the security deposit of the CM Additional incremental deposits of Rs.10 lakhs to NSCCL for each additional TM in case the CM undertakes to clear and settle deals for other TMs. Clearing Banks NSCCL has empanelled 13 clearing banks namely 1. Axis Bank Ltd. 2. Bank of India 3. Canara Bank 4. Citibank 5. HDFC Bank 6. Hongkong & Shanghai Banking Corporation Ltd. 7. ICICI Bank 8. IDBI Bank 9. IndusInd Bank 10. Kotak Mahindra Bank 11. Standard Chartered Bank 12. State Bank of India 13. Union Bank of India. Every Clearing Member is required to maintain and operate clearing accounts with any of the empanelled clearing banks at the designated clearing bank branches. The clearing accounts are to be used exclusively for clearing & settlement operations.

Clearing Account Every Clearing Member is required to maintain and operate a primary clearing account with any one of the empanelled clearing banks at the designated clearing bank branches. The primary clearing account is to be used exclusively for clearing operations i.e., for settling funds and other obligations to the Clearing Corporation including payments of margins and penal charges. A Clearing member having funds obligation to pay shall ensure availability of sufficient clear balance in the clearing account on or before the stipulated funds pay-in day and the stipulated time. Further, every clearing member can maintain and operate additional clearing accounts exclusively for the purpose of enhancement of collaterals. All the credits and debits other than collateral enhancement specified by the member shall be routed through the primary clearing account Clearing Members are required to authorise the Clearing Bank to access their clearing accounts for debiting and crediting their accounts, reporting of balances and other information as may be
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required by NSCCL from time to time as per the specified format. The Clearing Bank will debit/ credit the clearing account of clearing members as per instructions received from the Clearing Corporation. A Clearing member can deposit funds into this accounts in any form, but can withdraw funds from these accounts only in self-name. Clearing members shall not seek to close or de-activate the clearing account without the prior written consent of the Clearing Corporation

Clearing Mechanism
A Clearing Member's open position is arrived by aggregating the open position of all the Trading Members (TM) and all custodial participants clearing through him. A TM's open position in turn includes his proprietary open position and clients open positions. a. Proprietary / Clients Open Position While entering orders on the trading system, TMs are required to identify them as proprietary (if they are own trades) or client (if entered on behalf of clients) through 'Pro / Cli' indicator provided in the order entry screen. The proprietary positions are calculated on net basis (buy - sell) and client positions are calculated on gross of net positions of each client i.e., a buy trade is off-set by a sell trade and a sell trade is off-set by a buy trade. b. Open Position Open position for the proprietary positions are calculated separately from client position. For example, For a CM - XYZ, with TMs clearing through him - ABC and PQR Proprietary Position TM Security Buy Qty Sell Qty Net Qty Buy Qty Client 1 Sell Qty Net Qty Buy Qty Client 2 Sell Qty Net Qty 2000 Net Member Long 6000

NIFTY ABC January contract NIFTY PQR January contract

4000 2000

2000 3000 1000 2000 4000 2000

Long 1000 2000 3000 (1000) 2000 1000 1000 1000 2000 (1000) Short 2000

XYZs open position for Nifty January contract is: Member ABC
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Long Position Short Position 6000 0

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PQR Total for XYZ

1000 7000

2000 2000

Settlement Schedule The settlement of trades is on T+1 working day basis. Members with a funds pay-in obligation are required to have clear funds in their primary clearing account on or before 10.30 a.m. on the settlement day. The payout of funds is credited to the primary clearing account of the members thereafter.

Settlement Price Product Settlement Schedule Closing price of the futures contracts on the trading day. (closing price for a futures contract shall be calculated on the basis of the last half an hour weighted average price of such contract) Theoretical Price computed as per formula F=S * ert Closing price of the relevant underlying index / security in the Capital Market segment of NSE, on the last trading day of the futures contracts.

Futures Contracts Daily on Index or Settlement Individual Security Un-expired illiquid Daily futures contracts Settlement Futures Contracts on Index or Individual Securities Options Contracts on Index and Individual Securities Final Settlement

Closing price of such underlying security (or Final Exercise index) on the last trading day of the options Settlement contract.

Corporate Actions Adjustment The basis for any adjustment for corporate actions shall be such that the value of the position of the market participants, on the cum and ex-dates for the corporate action, shall continue to remain the same as far as possible. This will facilitate in retaining the relative status of positions viz. inthe-money, at-the-money and out-of-money. This will also address issues related to exercise and assignments. Corporate Actions to be adjusted
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the corporate actions may be broadly classified under stock benefits and cash benefits. The various stock benefits declared by the issuer of capital are: * Bonus * Rights * Merger / De-merger * Amalgamation * Splits * Consolidations * Hive-off * Warrants, and * Secured Premium Notes (SPNs) among others. The cash benefit declared by the issuer of capital is cash dividend.

Time of Adjustment Any adjustment for corporate actions would be carried out on the last day on which a security is traded on a cum basis in the underlying equities market, after the close of trading hours. Adjustment Adjustments may entail modifications to positions and / or contract specifications as listed below, such that the basic premise of adjustment laid down above is satisfied: a) Strike Price b) Position c) Market Lot / Multiplier The adjustments would be carried out on any or all of the above, based on the nature of the corporate action. The adjustments for corporate actions would be carried out on all open positions. Methodology for adjustment the methodology to be followed for adjustment of various corporate actions to be carried out are as follows: A. B. Bonus, Stock Splits and Consolidations Dividends 1. Dividends which are below 10% of the market value of the underlying stock would be deemed to be ordinary dividends and no adjustment in the Strike Price would be made for ordinary dividends. For extra-ordinary dividends, above 10% of the market value of the underlying security, the Strike Price would be adjusted. 2. To decide whether the dividend is "extra-ordinary" (i.e. over 10% of the market price of the underlying stock.), the market price would mean the closing price of the scrip on the day previous to the date on which the announcement of the dividend is made by the Company after the meeting of the Board of Directors. However, in cases where the announcement of dividend is made after the close of
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market hours, the same day's closing price would be taken as the market price. Further, if the shareholders of the company in the AGM change the rate of dividend declared by the Board of Directors, then to decide whether the dividend is extra-ordinary or not would be based on the rate of dividend communicated to the exchange after AGM and the closing price of the scrip on the day previous to the date of the AGM. 3. In case of declaration of extra-ordinary " dividend by any company, the total dividend amount (special and / or ordinary) would be reduced from all the strike prices of the option contracts on that stock. 4. The revised strike prices would be applicable from the ex-dividend date specified by the exchange.

C.

Mergers 1. On the announcement of the record date for the merger, the exact date of expiration (Last Cum-date) would be informed to members. 2. After the announcement of the Record Date, no fresh contracts on Futures and Options would be introduced on the underlying, that will cease to exist subsequent to the merger. 3. Un-expired contracts outstanding as on the last cum-date would be compulsorily settled at the settlement price. The settlement price shall be the closing price of the underlying on the last cum-date. 4. GTC/GTD orders for the futures & options contracts on the underlying, outstanding at the close of business on the last cum-date would be cancelled by the Exchange.

Penalties
The following penal charges are levied for failure to pay funds/ settlement obligations: Penal Charges a penal charge will be levied on the amount in default as per the byelaws relating to failure to meet obligations by any Clearing Member. Type of Default Overnight settlement shortage of value more than Rs.5 lakhs Security deposit shortage Shortage of Capital cushion Penalty Charge per day 0.07% 0.07% 0.07% Chargeable to Clearing Member Clearing Member Clearing Members
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Violations if any by the custodial participants shall be treated in line with those by the trading member and accordingly action shall be initiated against the concerned clearing member.

Short Reporting of Margins in Client Margin Reporting Files Penalty is levied in case of short reporting by trading/clearing member per instance. The amount of penalty varies as per the percentage of short reporting done by member

Percentage of short reporting (In terms of value) < 1% >1% but less than or equal to 10% >10% but less than or equal to 20% >20% but less than or equal to 100% No action

Penalty per instance

Reprimand Letter with no penalty Rs.500 or 0.05% of the shortage amount whichever is higher subject to maximum of Rs.50000 Rs.1000 or 0.1% of the shortage amount whichever is higher subject to maximum of Rs.100000

All instances of non-reporting are considered as 100% short reporting and the penalty as applicable is charged on these instances in respect of short reporting. Additionally in respect of members who have reported short collection of margins / not reported margin collections on more than three occasions in any calendar month, the penalty computation from the fourth instance onwards is escalated by a multiple as mentioned below:

Category More than 10% to 49.99% 50% to 79.99% 80% to100% 1.1 1.2 1.3

Multiple

Penalty and penal charges for margin/limit violation Penalty for margin / limit violation is levied on a monthly basis based on slabs as mentioned below or such other amount as specified by the Clearing Corporation from time to time.

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Instances of Disablement 1st instance 2nd to 5th instance of disablement 6th to 10th instance of disablement 11th instance onwards 0.07% per day

Penalty to be levied

0.07% per day + Rs.5,000/- per instance from 2nd to 5th instance 0.07% per day + Rs.20,000/- ( for 2nd to 5th instance) + Rs.10000/per instance from 6th to 10th instance 0.07% per day + Rs.70, 000/- (for 2nd to 10th instance) + Rs.10, 000/- per instance from 11th instance onwards. Additionally, the member will be referred to the Disciplinary Action Committee for suitable action.

Instances as mentioned above refer to all disablements during market hours in a calendar month. The penal charge of 0.07% per day is applicable on all disablements due to margin violation anytime during the day. FII/Mutual Fund position limit violation, In case of violation of FII/Mutual Fund limits a penalty of Rs. 5,000/- would be levied for each instance of violation. Client wise/NRI/sub account of FII/scheme of MF position limit violation In case of open position of any Client/NRI/sub-account of FII/scheme of MF exceeding the specified limit following penalty would be charged on the clearing member for each day of violation: 1% of the value of the quantity in violation (i.e., excess quantity over the allowed quantity, valued at the closing price of the security in the normal market of the Capital Market segment of the Exchange) per client or Rs.1,00,000 per client, whichever is lower, subject to a minimum penalty of Rs.5,000/- per violation / per client. When the client level/NRI/sub-account of FII/scheme of mutual fund violation is on account of open position exceeding 5% of the open interest, a penalty of Rs.5000 per instance would be levied to the clearing member.
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Market wide Position Limit violation At the end of each day during which the ban on fresh positions is in force for any security, when any member or client has increased his existing positions or has created a new position in that security the client/trading members will be subject to a penalty 1% of the value of increased position subject to a minimum of Rs.5000 and maximum of Rs.100000. The positions, for this purpose, will be valued at the underlying close price.

Securities Transaction Tax

STT Computation As per the Finance Act 2004, and modified by Finance Act 2008 (18 of 2008) STT on the transactions executed on the Exchange shall be as under: SI.No. A A B C Taxable securities transaction B Sale of an option in securities Sale of a futures in securities New rate from Payable by 01.06.2008 C 0.017 per cent 0.017 per cent D Seller Purchaser Seller

Sale of an option in securities, where option is exercised 0.125 per cent

a. Value of taxable securities transaction relating to an option in securities shall be the option premium, in case of sale of an option in securities. b. Value of taxable securities transaction relating to an option in securities shall be the settlement price, in case of sale of an option in securities, where option is exercised. The following procedure is adopted by the Exchange in respect of the calculation and collection of STT: 1. STT is applicable on all sell transactions for both futures and option contracts. 2. For the purpose of STT, each futures trade is valued at the actual traded price and option trade is valued at premium. On this value, the STT rate as prescribed is applied to determine the STT liability. In case of final exercise of an option contract STT is levied on settlement price on the day of exercise if the option contract is in the money. 3. STT payable by the clearing member is the sum total of STT payable by all trading members clearing under him. The trading members liability is the aggregate STT liability of clients trading through him.

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Information to members a report is provided to the members at the end of each trading day. The report contains information on the total STT liability, trading member wise STT liability, client wise STT liability and also the detailed computations for determining the client wise STT liability.

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Indices
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Graph of S&P CNX Nifty from January 1997 to March 2011 NSE also set up as index services firm known as India Index Services & Products Limited (IISL) and has launched several stock indices, including:

S&P CNX Nifty(Standard & Poor's CRISIL NSE Index) CNX Nifty Junior CNX 100 (= S&P CNX Nifty + CNX Nifty Junior) S&P CNX 500 (= CNX 100 + 400 major players across 72 industries) CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)

Exchange Traded Funds on NSE

NSE has a number of exchanges. These are typically index funds and GOLD ETFs. Some of the popular ETF's available for trading on NSE are:

NIFTYBEES - ETF based on NIFTY index Nifty BEES Live quote Gold Bees - ETF based on Gold prices. Tracks the price of Gold. Each unit is equivalent to 1 gm of gold and bears the price of 1gm of gold.

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COMPANY PROFILE
With an unblemished and reputed track record, ITIFSL is all set to become an imposing wealth management firm in the country by giving the best to its clients and ensuring customer delight.. ITIFSL is emerging as one of the top most wealth management companies in India with a presence in over 120 branches across the country. ITIFSL, originally promoted by the Investment Trust of India, is now a part of the Sharyans Group. The Sharyans Group has an impressive portfolio of businesses under its fold which mainly fall under the real estate and financial services categories. The prominent subsidiaries of this Group are Prebone Yamane (Countrys largest debt broking company), In time Spectrum Commodities Pvt. Ltd., In time Spectrum Securities Ltd., In time Spectrum Finmart Pvt. Ltd., Sharyans Wealth Management Pvt. Ltd., ITIAI Investment Advisory Services Pvt. Ltd., and Collin Stewart India Ltd. Under the banner of the Sharyans Group, ITIFSL will soon touch the pinnacles of success in the financial services industry by being a dominant force in the broking as well as the distribution arena. ITI is a knowledge center where it provides knowledge on Equity Commodity, Mutual Fund, Derivatives and IPO. COMPANIES BUSINESS With the objective to tap the growing potential in our capital markets, ITI FSL has been set up to engage in: Stock Broking Institutional Broking Derivatives including Currency Derivatives Depository Services Distribution of Investment Products Distribution of Insurance Commodities Broking* Forex Spot Broking

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MISSION AND VISION: Miss

ion:
ITI FSL's mission is to deliver value with commitment. Emerging as one of the front-line Brokerage Houses and a dominant force in the Distribution arena, we are continuously engaged in the assessment of market conditions to balance risk and reward so as to optimize returns to our investors.. Vision; "To be the most Preferred Financial Advisor, Creator, Wealth Manager and to deliver the Highest Standards of Service to customers and be Prominent in the horde of Finance Companies offering similar services". Our presence Headquartered in Chennai, ITI FSL has a growing network of offices across several states to ensure easy accessibility to our clients wherever they are. ITIFSL has over 120 Branch Offices spread across the country to offer better reach and service to the investor. The company currently marks its presence in the following regions: Andhra Pradesh Delhi Karnataka Maharashtra Gujarat Madhya Pradesh Tamil Nadu Pondicherry West Bengal

PRODUCT AND SERVICES The company deals with wide variety of product and service which are stated as follow: Equity and Derivatives Commodities Depository Institutional and NRI
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Investment and Advisory Research

Equity And Derivatives Equity and derivatives go hand in hand as they help maximize return and minimize risk at the same time! ITI clients are assisted in protecting the downside risk to their portfolio using appropriate combination of options. Our advisory is skilled to help you in maximizing your gains from your existing corpus using numerous strategies based on the direction and intensity of the views. ITI ensures that you get the one of the finest trading experiences through:

A high level of personalized and confidential service Secure ,integrated broking system Powerful research and analytic All member having immense experience and each of them being professionally certified by the National stock exchange.

COMMODITY TRADING

Commodities are now an asset class! For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are an excellent option. Commodities are one of the easiest investment avenues to understand as they are based on the fundamentals of demand and supply. Historically, prices in commodities futures have been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. ITI helps investors understand the risks and advantages of trading in commodities futures before take they take the big leap.

It provides clients with an effective platform to participate and trade in Commodities with both the leading Commodity Exchanges of the country.

ITI commodity services are a class apart and the following features differentiate our services from others: Streaming quotes and live update
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Relationship management desk Educating clients on commodity future market Research on agro Commodities, Precious metal and Energy product.

Depository Service
ITI is a depository participant with Central Depository Services (India) Limited (CDSL) and uses the latest in technology to deliver DP Services in a hassle free, secure and transparent environment. There are two main reasons why you should use ITIs DP services: ITI ensure that its client focus on investment and trading decision rather than drudgery of operational and transaction process ITI offer risk free, prompt and efficient depository process.

Depository Services provided by ITI include:

Account opening Dematerialization Rematerialization Account transfer Pledging Nominee

INSTITUTIONAL AND NRI SERVICES

Dedicated institutional desks at Mumbai and Chennai cater to our rapidly growing Institutional clientele, which include FIIs, Mutual Funds, Banks, Insurance Companies, Corporate clients and Overseas Corporate Bodies With our dedicated and superior quality service to our clients, ITI is being recognized as the broker of choice among various institutional investors Some of our esteemed clients include:

Indian overseas bank Power trading company limited Star health and allied insurance company limited

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NRI service The NRI Services' Department is an exclusive arm of ITI dedicated to impart professional advice to NRIs the world over. ' Our exclusive single-window NRI Services Department integrates and simplifies multiple processes into one - opening of NRI bank account, demat account and trading account NRIs, NROs (Non-Resident of Indian Origin) and OCBs (Overseas Corporate Bodies) can now exploit multiple opportunities to profit from India's NRI-friendly investment environment and a booming Indian econo

Investment Advisory
ITI has a dedicated team of professionals handling the investment advisory services of the firm. These experts use their knowledge of investments, tax laws, and insurance to recommend financial options to clients in accordance with their short-term and long-term goals. Some of the issues that the specialists address are general investments, retirement planning, tax planning and child education & welfare planning. Our certified Investment Advisory Managers strive to understand each individual clients needs, risk profiles and investment goals to provide the best advice. Apart from advising, they help clients build and track their investments. They also regularly monitor report and recommend changes based on the performance of the portfolio. Company offer advice on and help invest in the following products:

Mutual fund Insurance- life & non-life Bonds Deposits IPO Small saving instrument

Research
Our primary strengths lie in research and operational efficiency. The day-to-day operations are managed by some of the best professionals in the industry having in-depth understanding of underlying market trends and sound business practices. The Research Team comprises of competent professionals with vast experience, insightful analytical abilities and high standards of integrity. Some of ITI research reports are as follow: [Type text] Page 38

Economic outlook and updates Sector and company reports Technical recommendation Daily market report Daily technical outlook Reports on new fund offering Weekly debt report Monthly newsletter Monthly four pagers-ITI wealth wise Weekly analysis of mutual fund ITI also offer daily technical calls through SMS to our client free of charge.

ITI deals in providing market updates for Equity, Commodity, Currency Derivative, Mutual fund,IPO Insurance, Debt market in terms of: Top gainers and losers Weekly gainer and loser Historical returns Index mover Volume topper Value topper Bulk deals Block deals Sector watch

It also provides News and Research for the investor which includes following point: News analysis Corporate information Corporate announcement Research notes Financial calculator Technical call Technical charts They also take care of investor grievances by providing mail ids for complaint related to Transaction, DP etc.

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ACHIEVEMENTS AND AWARDS WON BY ITI

ITI, the retail broking is one of the largest stock broking houses in the country, has won the prestigious Awaaz Consumer Vote Awards 2005 for the Most Preferred Stock Broking Brand in India, in the Investment Advisors category. This was Indias largest Customer Study initiated by CNBC Awaaz and conducted by AC Nielson covering 7000 respondents, 21 products and services across 21 major cities. Rated among the top 20 wired companies along with RELIANCE, HLL, and INFOSYSetc. by Business Today. ORG Marg award by CNBC. India internet World 2008 for the Best Finance site. ITIs online trading and investment site www.itifinancial.com was launched in 2000. ITIs ground network includes over 250 centers across 123 cities in India and having around 120000 customers and an equal number of demat customers. The reasons behind the preferences for brands were unveiled by examining the following: Tangible features of product / service Softer, intangible features like imagery, equity driving preference Tactical measures such as promotional / pricing schemes

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WORK FLOW MODEL

CUSTOMER OVERVIEW

CALL DESK

ONLINE DESK

SALES REP

APPLICATION

PROCESSING

GENERATION OF CLASSIC A/C

PORTFOLIO ANALYSIS & RESEARCH

PAYMENT FOR INVESTMENT IN DP A/C

TRADING THROUGH ITI

HOLDINGS & STATEMENTS

RETURNS

CUSTOMER SERVICE

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The Service Delivery Model of ITI is a blend of both tradition and technology.

RESEARCH DESIGN STATEMENT OF PROBLEM

This project studies about option derivatives. This project shows how options are useful especially for speculators, who actually bet on the direction of price movements. While profits could be extremely high, potential for losses are also large. A model is to be developed which helps in trading in option derivative market. It should give the pay-off for not only individual options but also for combination of options. And to know which option combination strategy would be suitable when market moves up or down.

Objectives of study
Find appropriate options in banking stocks which are most profitable during the period of April and May 2011. Compare investment and returns associated with the options trading in banking stocks. To reduce Risk involved in Markets due to various factors like Timing, Positioning, Settlement, Carry forward, Covering Positions.

SCOPE OF THE STUDY

The study tries to find the best option combination for the script, which have maximum profits. It also compares the returns and investment between portfolios of scrips and option. This Study can also be extended to other scrips and hence forth find the option combination which is most profitable.

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RESEARCH METHODOLOGY
Tools of Data Coll ecti on

P r i ma r y D a t a : P ri m ar y d at a i s co l l ec t ed t h ro u gh i n t erv i ewi n g t h e s t af f o f Ko t ak S ecu ri t i es an d Li v e C ap i t al M ar k et D at a. Secondary Da ta: S e co n d ar y d at a i s co l l e ct e d t h r o u gh T e x t Bo o k s , W eb s i t es an d C o m p an y Br ochu re . . SAMPLING PLAN Put and call options of the banking stocks with strike price and expiry date. All options will be selected from National Stock Exchange.

S a mp l e S i z e : 1 . In C a s e o f c o m p a n i e s : 1 5 c o m p a n i e s . 2 . 1 0 r e s p o n d e n t s o f IT I S e c u r i t i e s .

PLAN OF ANALYSIS: The collected information will be tabulated and analyzed in detail. Various tabulations will be used to explain the findings clearly. Theoretical background is one of the important parts of the project. The very basic purpose of this is to gain an insight and provide an overview of the study carried on. It will help me to gain strong theoretical basis of the option trading.

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DERIVATIVES MARKET

EMERGENCE OF DERIVATIVES MARKET With globalization of the financial sector, it's time to recast the architecture of the financial market. The liberalized policy being followed by the Government of India and the gradual

withdrawal of the procurement and distribution channel necessitated setting in place a market mechanism to perform the economic functions of price discovery and risk management. Till the mid 1980's, the Indian financial system did not see much innovation. In the last 18 years, financial innovation in India has picked up and it is expected to grow in the years to come, as a more liberalized environment affords greater scope for financial innovation at the same time financial markets are, by nature, extremely volatile and hence the risk factor is an important concern for financial agents. To reduce this risk, the concept of derivatives comes into the picture. Derivatives are products whose values are derived from one or more basic variables called bases. India is traditionally an agriculture country with strong government intervention. Government arbitrates to maintain buffer stocks, fix prices, impose import-export restrictions, etc. Derivatives are financial contracts whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as: interest rates, exchange rates, commodities, and equities. Derivatives include a wide assortment of financial contracts, including forwards, futures, swaps, and options. The International Monetary Fund defines

derivatives as "financial instruments that are linked to a specific financial instrument or indicator or commodity and through which specific financial risks can be traded in financial markets in their own right. The value of financial derivatives derives from the price of an underlying item, such as asset or index. Unlike debt securities, no principal is advanced to be repaid and no investment income accrues." While some derivatives instruments may have

very complex structures, all of them can be divided into basic building blocks of options, forward contracts or some combination thereof. Derivatives allow financial institutions and other participants to identify, isolate and manage separately the market risks in financial instruments and commodities for the purpose of hedging, speculating, arbitraging price differences and adjusting portfolio risks.
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The emergence of the market for derivatives products, most notable forwards, futures, options and swaps 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 can be subject to 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, derivatives products generally do not

influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivatives products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. Factors generally attributed as the major driving force behind growth of financial derivatives are: (a) Increased Volatility in asset prices in financial markets, (b) Increased integration of national financial markets with the international markets, (c) Marked improvement in communication facilities and sharp decline in their costs, (d) Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and (e) 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 transaction costs as compared to individual financial assets.

Development of exchange-traded 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 May 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.
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DERIVATIVES MARKET IN INDIA

Derivatives markets have had a slow start in India. The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendments) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no Regulatory framework to govern trading of derivatives. SEBI set up a 24-member committee under the Chairmanship of Dr. L.C. Gupta on 18th November 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee recommended that derivatives should be declared as 'securities' so that regulatory framework applicable to trading of 'securities' could also govern trading of securities. SEBI was given more powers and it starts regulating the stock exchanges in a professional manner by gradually introducing reforms in trading. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval in May 2000. SEBI permitted the derivative segments of two stock exchanges, viz. NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivative contracts. Following the committee's recommendations, the Securities Contract Regulation Act

(SCRA) was amended in 1999 to include derivatives within the scope of securities, and a regulatory framework for administering derivatives trading was laid out. The act granted legality to exchange-traded derivatives, but not OTC (over the counter) derivatives. It allowed derivatives trading either on a separate and independent derivatives exchange or on a separate segment of an existing stock exchange. The derivatives exchange had to function as a self-regulatory organization (SRO) and SEBI acted as its regulator. The responsibility of clearing and settlement of all trades on the exchange was given to the clearing house which was to be governed independently. Introduction of derivatives was made in a phase manner allowing investors and traders sufficient time to get used to the new financial instruments. On June 9, 2000, the

Bombay Stock Exchange (BSE) introduced India's first derivative instrument - the BSE30 (Sensex) index futures. It was introduced with three month trading cycle - the near month (one), the next month (two) and the far month (three). The National Stock Exchange (NSE) followed a few days later, by launching the S&P CNX Nifty index futures on June 12, 2000.The trading in
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index options commenced in June 2001 and trading in options on individual securities commenced in July 2001. Futures contracts on individual stock were launched in November 2001. In June 2003, SEBI/RBI approved the trading in interest rate derivatives instruments and NSE introduced trading in futures contract on June 24, 2003 on 91 day Notional T-bills. Derivatives contracts are traded and settled in accordance with the rules, bylaws, and regulations of the respective exchanges and their clearing house/corporation

duly approved by SEBI and notified in the official gazette. The plan to introduce derivatives in India was initially mooted by the National Stock Exchange (NSE) in 1995. The main purpose of this plan was to encourage greater participation of foreign institutional investors (FIIs) in the Indian stock exchanges. Their involvement had been very low due to the absence of derivatives for hedging risk. However, there was no consensus of opinion on the issue among industry analysts and the media. The pros and cons of introducing derivatives trading were debated intensely. The lack of transparency and inadequate infrastructure of the Indian stock markets were cited as reasons to avoid derivatives trading. Derivatives were also considered risky for retail investors because of their poor knowledge about their operation. In spite of the opposition, the path for derivatives trading was cleared with the introduction of Securities Laws (Amendment) Bill in Parliament in 1998. The introduction of derivatives was delayed for some more time as the infrastructure for it had to be set up. Derivatives trading required a computer-based trading system, a depository and a clearing house facility. In addition, problems such as low market capitalization of the Indian stock markets, the small number of institutional players and the absence of a regulatory framework caused further delays. Derivatives trading eventually started in June 2000. The introduction of derivatives was well received by stock market players. Trading in derivatives gained substantial popularity, and soon the turnover of the NSE and BSE derivatives markets exceeded the turnover of the NSE and BSE cash markets. For instance, in the month of January 2004, the value of the NSE and BSE derivatives markets was Rs.3278.5 billion (bn) whereas the value of the NSE and BSE cash markets was only Rs.1998.89 bn.
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In spite of these encouraging developments, industry analysts felt that the derivatives market had not yet realized its full potential. Analysts pointed out that the equity derivative markets on the BSE and NSE had been limited to only four products - index futures, index options and individual stock futures and options which were limited to certain select stocks. The NSE and BSE are two exchanges on which financial derivatives are traded. The combined notional values of the daily volumes on both the bourses stand at around RS.400 cr. In developed markets trading in the derivatives segment are thrice as large as in the cash markets. In India, the figure is hardly 20% of cash markets. Quite clearly our derivative markets have a long way to go.

The need for a derivatives market

The derivatives market performs a number of economic functions: 1. They help in transferring risks from risk adverse people to risk oriented people 2. They help in the discovery of future as well as current prices 3. They catalyze entrepreneurial activity 4. They increase the volume traded in markets because of participation of risk adverse people in greater numbers 5. They increase savings and investment in the long run people

Types of investors trade in derivatives markets.

1) Hedgers: Hedgers enter the derivatives market to lock-in their prices to avoid exposure to adverse movements in the price of an asset. While such locking may not be extremely profitable the extent of loss is known and can be minimized.

2) Speculators: Speculators take positions in the market. They actually bet on the direction of price movements. While profits could be extremely high, potential for losses are also large.
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3) Arbitrageurs: Arbitrageurs enter simultaneously into contracts in two or more markets to lock in risk less profit. In India such gains are minimal as price differences on NSE and the BSE are extremely small.

CLASSIFICATION OF DERIVATIVES:
Derivatives are basically classified based upon the mechanism that is used to trade on them. They are:

The OTC derivatives are between two private parties and are designed to suit the requirements of the parties concerned. The Exchange traded ones are standardized ones where the exchange sets the standards for trading by providing the contract specifications and the clearing corporation provides the trade guarantee and the settlement activities Common examples of derivatives are:

Some less common, but economically intriguing, examples are:

Measured by national statistical agencies

FORWARD CONTRACTS
A forward contract is a particularly simple derivative. It is an agreement to buy or to sell an asset at a certain future time for a certain price. The contract is usually between two financial institutions and one of its corporate clients. It is not normally traded on exchange.
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One of the parties to a forward contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. The specified price in a forward contract will be referred to as the delivery price. At the time the contract is entered into the price is chosen so that the value of the forward contract to both parties is zero. This means that it costs nothing to take either a long or short position.

A forward contract is settled at maturity. The holder of short position delivers the asset to the holder of long position in return for a cash amount equal to delivery price. A key variable determining the value of a forward contract at any given time is the market price of the asset. As already mentioned, a forward contract is worth zero when it is first entered into. Later it can have a positive or negative value, depending on movements in the price of the asset. For example, if the price of the asset rises sharply soon after the initiation of contract, the value of a long position in the forward contract becomes positive and value of a short position of a forward contract becomes negative.

The main features of forward contracts are They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. The contract price is generally not available in public domain. The contract has to be settled by delivery of the asset on expiration date. In case, the party wishes to reverse the contract, it has to compulsorily go to the same counter party, which being in a monopoly situation can command the price it wants.

FUTURES CONTRACT
A futures contract is a form of forward contract, a contract to buy or sell an asset of any kind at a pre-agreed future point in time that has been standardized for a wide range of uses. It is
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traded on a futures exchange. Futures may also differ from forwards in terms of margin and delivery requirements. To make trading possible, the exchange specifies certain standardized features of the contract. As the two parties to the contract do not necessarily know each other, the exchange also provides the mechanism which gives the two parties guarantee that the contract will be honored.

For example, Coffee grower may enter into a contract with a wholesale buyer to sell Coffee at a particular price on a future date. The coffee buyer could have a mutually agreed contract with the seller (Forward Contract) or he / she could buy a contract through a regulated market like the Coffee Futures Exchange India Limited (COFEI). The National Stock Exchange and the Bombay Stock Exchange offer such facilities for trading Futures and Option contracts an underlying financial instrument like stocks/shares.

The types of futures that are traded fall into four fundamentally different categories. The underlying asset traded may be a physical commodity, foreign currency, an interest-earning asset or an index, usually a stock index.

A commodity futures contract is an agreement between two parties to buy or sell a specified quantity and quality of commodity at a certain time in future at a certain price agreed at the time of entering into the contract on the commodity futures exchange.

A currency future is a transferable futures contract that fixes the price at which a foreign currency can be bought or sold at a specified future date. Investors use these financial future contracts to hedge against foreign exchange risk. These financial derivatives can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates. Investors can close out the contract at any time prior to the contract's delivery date. The futures can be on the interbank cash rate or on the forward exchange rate of the currency. Currency futures are quoted in US-dollars per unit of foreign currency.

An interest rate future is a futures contract with an interest bearing instrument as the underlying asset. Examples include Treasury-bill futures, Treasury-bond futures, LIBOR futures, Euro dollar futures.
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The attributes in which the futures contracts differ from forwards are:

Attributes Contract type

Forwards Privately traded

Futures Exchange traded

Contract term Price transparency Price discovery Liquidity Credit Risk

Customized Poor Poor Poor High

Standard Good Good Good Low

Futures contracts are traded on an exchange. Forward contracts are mutually agreed between two parties. As expected, the only benefit of entering into a Forwards contract comes from the flexibility of having tailor-made contracts. Yet, Forwards are important as prices in Forward markets serve as indicator of Futures prices. Contracts on Futures markets are fixed in terms of contract size, product type, product quality, expiry, and mode of settlement. Futures markets, however, provide liquidity as contracts are traded on a broader client base. Counter party risk (of non-delivery / nonpayment) is also eliminated in the Futures market as the designated clearing house becomes counter party to each trade that is, it acts as buyer to seller and as a seller to the buyer and guarantees the trades.

INTRODUCTION TO OPTION
Definition An option is a contract between two parties in which one party (the buyer) has the right, but not the obligation, to buy or sell a specified asset at a specified price, at or before a specified date, from the other party (the seller). The seller of the option, therefore, has a contingent liability, or an obligation which is activated if the buyer exercises that right.
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The important feature is that the buyer of the option is not obliged to complete the deal and will do so only if changes in price make it profitable to do so. The buyer of the option is protected from unfavorable market movements but is still able to profit from movements in the buyers favor. The risk of loss is carried by the seller, who charges the buyer a fee for taking on this risk. This fee is called the premium.

This feature of an option contract distinguishes it from other instruments, such as forward contracts or futures contracts, in which both parties to the contract have an obligation to transact at some time in the future. In an option contract, only one party (the seller) has an obligation to transact, but this is only if the other party (the buyer) requires him to do so. The act of enforcing the buyers rights under an option contract is termed exercising the option.

Options, being contracts at law, create a legal relationship between the buyer and the seller of the option contract. This relationship can remain in place until the options exercised or, alternatively, allowed to lapse (i.e. not exercised prior to or on the expiration date). Alternatively, it is possible for the two parties to the contract to enter into an opposite contract and for these contracts to be offset against each other.

Types of Options:

Options have a long history. Options on equity stocks were available on the London Stock Exchange more than a century ago. These were principal-to-principal option arrangements and such instruments continued to develop on equity stocks in centers such as London and New York into the 1970s.

An innovation of great significance occurred in 1973 when a new exchange, the Chicago Board Options Exchange (CBOE), was opened. The CBOE was the worlds first formalized options market, offering exchange-traded options on US listed equity stocks.

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A number of US and overseas stock exchanges emulated the CBOE market, among the first of these being the Australian Stock Exchange which initiated a similar market on Australian listed equity stocks in 1976. Around the globe, there now exists a great diversity of exchange-traded options markets on equities, currencies, debt instruments and stock index instruments (traded on various exchanges) and on various futures contracts financial, agricultural and metals (traded on various futures exchanges). In addition to exchange-traded (ET) options, there are over-the-counter (OTC) options. Exchange-traded (ET) Options: ET options, as the name suggests, are options that originate and are traded on a formalized exchange. Equity options and future options are the types of ET options most commonly traded on an exchange. Trading of options on most exchanges is based on the system of open outcry on a physical trading floor. Trader transacts deals through a combination of hand signals and speech. However, there is now a trend towards electronic trading systems and it is expected that these will ultimately supersede the physical trading floor. This is the case in India, where there National Stock Exchange has had a screen-based trading system since inception. ET options transactions are settled through a clearing house, associated with (although not necessarily owned by) the exchange. The clearing house tracks the positions outstanding and monitors contracts as they pass between participants. It also supervises the collection and disbursement of premiums and margins. The other important function performed by the clearing house is novation. This is the process whereby the nexus between the two original contracting parties is broken. The clearing house then becomes the buyer to the seller and the seller to the buyer. Thus, the identity of the other party to an ET option contract is no longer of importance, nor in fact are parties to an original contract obliged to return to each other to complete or unwind the contract. Options traded on an exchange are highly standardized as to the type and maturity of the underlying instrument. This standardization makes it easy for market participants to deal in these instruments because there is no need for discussion or negotiations to determine the contract specifications the only item for negotiation is the price. This promoted the liquidity of the market since a large number of only a limited range of contracts are being traded at any one time.

Over-the-counter (OTC) Options:

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OTC options are not traded at a centralized market place or through a formalized trading system. Instead, participants arrange deals through face-to-face meetings or more commonly on the telephone. Essentially, an OTC option is a tailor-made options agreement between two or more parties. The contracts are not standardized in terms of quantity, delivery date or term to maturity. This lack of standardization has benefits in that the specification can more exactly meet the needs of the parties. Usually, there is no clearing house for OTC options. As a result, OTC option can involve higher credit risk because exposure is directly to the counterparty and there is no system of deposits or margins or a guarantee fund. Traders control this risk through credit assessments of counterparties and the setting of exposure limits. OTC markets exist in commodities (e.g. gold), equities, stock indices, debt instruments and foreign exchange.

Choosing Between ET and OTC Options: In choosing between ET and OTC options, there are four important factors to consider: Fit with exact client requirements: ET options are standardized while OTC options can be tailored to match exactly a partys requirements. Credit dimensions: ET options are guaranteed by clearing houses. OTC options are not. Pricing factors: In the case of ET options, the option price is market-determined, irrespective of the financial strength of the buyer or seller. In the OTC market, small accounts are not encouraged and prices may not reflect underlying supply and demand conditions, but rather, factors such as the institutions own book, client relationships, etc. Valuation: ET option prices are publicly available financial information. This being the case, traders can easily value their portfolio of options contracts by reference to their current price. In the OTC market, valuing the tailor-made specific option contract is not such a straightforward process. The trader of an OTC option must request a financial institution which deals in the relevant market to value the contract for him.

Key Elements of an Option: There are five key elements of an exchange-traded option contract: types of options whether it is a put or a call option underlying asset instrument on which the option is based
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strike price the price at which the option may be exercised expiry date and exercise style premium the cost of the option

OPTION TYPES Option type defines the nature of buyers right, which can be Right to buy the underlying asset, which is called the call option; or Right to sell the underlying asset which is called the put option.

CALL OPTION A call option is a financial contract between two parties, the buyer and the seller of the option. The buyer of the option has the right but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time for a certain price (the strike price). The seller assumes the corresponding obligations. A Call option is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits. If, for example, you wanted to rent a certain property, and left a security deposit for it, the money would be used to insure that you could, in fact, rent that property at the price agreed upon when you returned. If you never returned, you would give up your security deposit, but you would have no other liability. Call options usually increase in value as the value of the underlying instrument increases. When you buy a Call option, the price you pay for it, called the option premium, secures your right to buy that certain stock at a specified price, called the strike price. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium.

Simple Call Option example - How call option works? Suppose you are interested in buying 100 shares of a company. For the sake of this example let us say that the company is Coca Cola and the current price of its stock is 50. However instead of just buying the shares from the market what you do is the following: You contact your friend Ram and tell him "Hey Ram, I am thinking of buying 100 shares of Coca Cola from you at the price of 52. However I want to decide whether to actually buy it or not at the end of this month. Would that be OK? Of course what you have in mind is the following.
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If the stock price rises above 52, then you will buy the shares from Ram at 52 in which case you will gain by simply buying from Ram at 52 and selling it in the market at the price which is above 52. Ram will be at a loss in this situation. If the stock price remains below 52 then you simply wont buy the shares from him. After all, what you are asking Ram is the 'option' to buy those shares from him - you are not making any commitment. In order to make the above deal 'fair' from the viewpoint of Ram you agree to pay ram 2 per share, i.e. 200 in total. This is the (risk) premium or the money you are paying Ram for the risk he is willing to take - risk of being at a loss if the price rises above 52. Ram will keep this money irrespective of whether you exercise your option of going ahead with the deal or not. The price of 52, at which you would like to buy (or rather would like to have the option to buy) the shares is called the strike price of this deal. Deals of this type have a name- they are called a Call Option. Ram is selling (or writing) the call option to you for a price of 2 per share. You are buying the call option. Ram, the seller of the call option has the obligation to sell his shares even if the price rises above 52 in which case you would definitely buy it from him. You on the other hand are the buyer of the call option and have no obligation- you simply have the option to buy the shares.

Put Option
A put option is a contract between two parties to exchange an asset, the underlying, for a specified amount of cash, the strike, by a predetermined future date, the expiry or maturity. One party, the buyer of the put, has the right, but not an obligation, to sell the asset at the strike price by the future date, while the other party, the seller, has the obligation to buy the asset at the strike price if the buyer exercises the option. A Put options are options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies. If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases. If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk. With a Put option, you can "insure" a stock by fixing a selling price. If something happens which causes the stock price to fall, and thus, "damages" your asset, you
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can exercise your option and sell it at its "insured" price level. If the price of your stock goes up, and there is no "damage," then you do not need to use the insurance, and, once again, your only cost is the premium. This is the primary function of listed options, to allow investors ways to manage risk. Simple Put Option Example - How put option works? Let us consider a situation where now Ram wants the option to sell you his 100 shares of Coca Cola at 48. He agrees to pay you 2 per share in order to be able to have the 'option' to sell you his 100 shares at the end of the month. Of course what he has in mind is that he will sell them to you if the price falls below 48, in which case you will be at a loss by buying the shares from him at a price above the market price and he will be relatively better off rather than selling the shares in the market. The 2 he is willing to pay you is all yours to keep irrespective of whether Ram exercises the option or not. It is the risk premium. In this case Ram is buying a Put Option from you. You are writing or selling a Put Option to Ram. 48 is the strike price of the Put Option. In this case, you the seller or writers of the Put Option have the obligation to buy the shares at the strike price. Ram, the buyer of the Put Option has the option to sell the shares to you. He has no obligation.

Difference between above option examples and 'real life options'

The above examples illustrate the basic ideas underlying, writing a call, buying a Call, writing a Put and selling a Put. In real life you sell (or write) and buy call & put options directly on the stock exchange instead of 'informally dealing' with your friend. Here are some key points to remember about real life options trading. 1. Options trading are directly or automatically carried through at the stock exchange, you do not deal with any person 'personally'. The stock exchange acts as a 'guaranteer' to make sure the deal goes through. 2. Each Options contract for a particular stock has a specified LOT SIZE, decided by the stock exchange. 3. The writers or sellers of Call and the Put option are the ones who are taking the risk and hence have to pay 'margin' amount to the stock exchange as a form of guarantee. This is just like the margin money you pay while buying or selling a futures contract and as explained in the post on futures trading. The buyers of Call and Put options on the other hand are not taking any risk. They do not pay any margin. They simply pay the Options premium

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PAY-OFFS FOR OPTION CONTRACTS

1) Long Call Spread

Construc tion Buy a call (A). S ell call at higher strike ( B). Enter when the stock p rice is in be tween the two strike pric es.

Marke t Expecta tion Ma rket expected to be bullish . Th e sprea d h a s th e a d va nta ge o f being ch ea per to esta blish than the purchase of a single call, as the prem ium received from the sold call reduces the overall cost. The spread offers a limited prof it potential if the underly ing rises and a l imited loss if the under lying fa lls.

Profi t and loss character istics at expiry:

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P rofi t: Limited to the differenc e be tween the t wo strikes minus net pr emium cost. Maximum profit occurs where the underlying rises to the level of the higher strike B or above. L o s s : L im i t e d t o a n y i n i t i a l p r e m i u m p a i d i n e s t a b l i s h i n g t h e p o s i t i o n . M a x i m um l o s s o c c u r s where the underlying f alls to the level of the lower strike A or be low. B r e a k - e v e n : R e a c h ed wh e n t h e u n d e r l y i n g i s a b o v e s t r i k e A b y t h e s a m e a m ou n t a s t h e n e t cost of establishing the position.

Simulation
Reliance Natural R esources Limited [RNRL]
Lot size: 7150 Style: Amer ican

Construc tion

Entry 03rd January 2008 Stock Price a t Rs.194.85 Buy 190.00 Jan Call option @ Rs.11.00 Sell 200.00 Jan Call opti on @ Rs.14.00

Exit 09th January 2008 Stock Price a t Rs.228.70

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Sell 190.00 Jan Call opti on @ Rs.58.00 Buy 200.00 Jan Call option @ Rs.39.00

Eff ective Pro fit/Loss 190.00 Jan Call option: Profit Rs .47 [58.00-11.0 0] 200.00 Jan Call option: Loss Rs.25 [14.00-39.0 0] Net Profit Rs. 22/share Profit made on using Strategy [Profi t/share x Lot size ] Rs. 1 ,57,300.00 [22.00 x 7150]

2) Short Put Spread

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Sell a put (B), buy put at a lower strike (A). Enter when the stock p rice is in be tween two strike pr ices. Marke t Expecta tion Ma rk et expected to be bu llish . Th e Sh o rt Pu t a t B a im s to ta k e a d v a ntage o f a bu llish m a rk et and the prem ium gained affords som e downside protec tion wi th a Long Put at A . Th e sp read offers a limited profit potential if the underly ing rises and a limited loss if the underlying falls. Profi t and loss character istics at expiry: P rofi t: Limited to the net premium credited. M aximum profit occurs where underlying rises to the level of the higher strike B or above. L o ss: Ma xim um lo ss o cc u rs wh ere th e u nd erly ing fa l ls to th e lev e l o f th e lo wer s trik e A o r below. B rea k - ev en: Rea ch ed wh en th e u nd erly ing is b elo w str ik e B by th e sa m e a m o u nt a s th e net credit of es tablishing the position.

Simulation
Reliance Natural R esources Limited [RNRL]
Lot size: 7150 Style: Amer ican

Construc tion

Entry 10th January 2008

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Stock Price a t Rs.208.15 Buy 200.00 Jan Put opti on @ Rs.12.00 Sell 220.00 Jan Put opti on @ Rs.27.00

Exit 14th January 2008 Stock Price a t Rs.222.05 Sell 200.00 Jan Put opti on @ Rs.6.20 Buy 220.00 Jan Put opti on @ Rs.11.00

Eff ective Pro fit/Loss 200.00 Jan Put option: L oss Rs.5.80 [6.20-12.0 0]

220.00 Jan Put option: Profit Rs .16.00 [27.00-1 1.00] Net Profit Rs. 10.20/share Profit made on using Strategy (Profi t/share x Lot size) Rs. 7 2,930.00 [10.20 x 7150]

3) Short Call Spread

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Construc tion Sell a call (A) ; buy call at higher strike ( B). Marke t Expecta tion Market expect ed to be bearish. The Short Call at A aims to take a dvantage of a bearish market and the premium gained affords some upside protect ion with a Long Call at B. The spread offers a limited profit i f the underlyi ng falls and a limited loss exposure if th e underlying rises. Profi t & loss character ist ics at expiry: P r o f i t: L im i t e d t o t h e n e t p r e m i u m c r e d i t e d . M a x i m u m p r o f i t o c c u r s w h e r e u n d e r l y i n g f a l l s to the level of the lowe r strike A or be low. L o s s : L im i t e d t o t h e d i f f e r e n c e b e t w e e n t h e t w o s t r i k e s m i n u s t h e n e t c r e d i t r e c e i v e d i n establi shing the positio n. Maximum loss occurs where the underlying rise s to the leve l o f the higher strike B or above. B r e a k - e v e n : R e a c h ed wh e n t h e u n d e r l y i n g i s a b o v e s t r i k e p r i c e A b y t h e s a m e am o u n t a s t h e net credi t of es tablishin g the position.

Simulation
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Reliance Energy Limite d [REL]

Lot size: 550 Style: Amer ican

Construc tion

Entry 11th January 2008 Stock Price a t Rs.2485.7 0 Buy 2700.00 Jan Call option @ Rs.50.00 Sell 2500.00 Jan Call option @ Rs.116.00

Exit 21st January 2008 Stock Price a t Rs.1764.3 5 Sell 2700.00 Jan Call option @ Rs.9.00 Buy 2500.00 Jan Call option @ Rs.7.50

Eff ective Pro fit/Loss 2700.00 Jan Call option: Loss Rs.41.00 [9.00-50. 00] 2500.00 Jan Call option: Profit R s.108.50 [116.0 0-7.50]

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Net Profit Rs. 67.50/share Profit made on using Strategy (Profi t/share x Lot size) Rs. 3 7,125.00 [67.50 x 550]

4) Long Put Spread

Construc tion Buy a put (B), se ll put a t lower s trike ( A). Marke t Expecta tion Market expec ted to be bearish. The spread has th e advantage of being cheaper to es tablish than the purchase of a single put, as the pre mium received from the sold put reduces the overall cost. The sprea d offers a limi ted loss e xposure if the underlyi ng rises and a limit ed profit i f the underlying falls. Profi t & loss character ist ics at expiry:

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P rofi t: Limited to the differenc e be tween the t wo strikes minus net pr emium cost. Maximum profit occurs where und erlying falls to the level of the lower strike A o r below. L o ss: L im ited to th e ini tia l pr em iu m pa id in es ta blish ing th e po sitio n. Ma x im um lo ss o ccu rs where the underlying ri ses to the level of the higher strike B or above. B r e a k - e v e n : R e a c h ed wh e n t h e u n d e r l y i n g i s b e l o w s t r i k e p r i c e B b y t h e s a m e am o u n t a s t h e net cost of e stablishing the position.

Simulation
Ma h a na ga r Teleph o ne N ig a m L im ited [MTN L ]
Lot size: 1600 Style: Amer ican

Construc tion

Entry 0 3 r d J a n u a ry 2 0 0 8 Stock Price a t Rs.211.00 Buy 190.00 Jan Put opti on @ Rs.2.20 Sell 180.00 Jan Put opti on @ Rs.1.10

Exit 21st January 2008 Stock Price a t Rs.141.00

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Sell 190.00 Jan Put opti on @ Rs.37.80 Buy 180.00 Jan Put opti on @ Rs.20.00

Eff ective Pro fit/Loss 190.00 Jan Put option: Profit Rs .35.00 [37.80-2 .20] 180.00 Jan Put option: L oss Rs.18.90 [1.10-20.00 ] Net Profit Rs. 16.10/share Profit made on using Strategy (Profi t/share x Lot size) Rs. 2 5,760.00 [16.10 x 1600]

Option Feature In other contracts, the focus is on underlying asset and each counterpart has right and obligation to perform. For example, in futures contract, the buyer has the right and obligation to buy; and seller, the right and obligation to sell. Option contract differs from others in two respects. The primary focus is on right and obligation not on underlying asset. Second, the right and obligation are separated, with buyer taking the right without obligation and seller taking the obligation without right. Thus, the distinguishing feature of option is the right-without-obligation for the buyer. In option contract, what the buyer buys is the right, not the underlying asset; and what the seller sells is the right, not the underlying asset.

OPTION FRAMEWORKS
The buyer assumes a long position, and the seller a corresponding short position. (Thus the seller of a call is "short a call" and has the obligation to sell to the holder, who is "long of a call option" and who has the right to buy. The writer of a put is "on the short side of the position", and has the obligation to buy from the taker of the put option, who is "long a put".)
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The option style will affect the terms and valuation. Generally the contract will either be American style - which allows exercise before the maturity date or European style - where exercise is on a fixed maturity date. European contracts are easier to value and therefore to price. The contract can also be on an exotic option.

Buyers and sellers of option do not (usually) interact directly; the option exchange acts as intermediary and quotes the market price of the option. The seller guarantees the exchange that he can fulfill his obligation if the buyer chooses to execute.

The risk for the option holder is limited: he cannot lose more than the premium paid as he can "abandon the option". His potential gain is theoretically unlimited; see strike price.

The maximum loss for the writer of a put option is equal to the strike price. In general, the risk for the writer of a call option is unlimited. However, an option writer who owns the underlying instrument has created a covered position; he can always meet his obligations by using the actual underlying. Where the seller does not own the underlying on which he has written the option, he is called a "naked writer", and has created a "naked position". Option can be in-the-money, at-the-money or out-of-the-money. The "in-the money" option has a positive intrinsic value, option in "at-the-money" or "out-of the- money" has an intrinsic value of zero. Additional to the intrinsic value an option has a time value, which decreases, the closer the option is to its expiry date.

OPTION USES
One can combine option and other derivatives in a process known as financial engineering to control the risk in a given transaction. The risk taken on can be anywhere from zero to infinite, depending on the combination of derivative features used.

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By using option, one party transfers (buys or sells) risk to or from another. When using option for insurance, the option holder reduces the risk he bears by paying the option seller a premium to assume it.

Because one can use option to assume risk, one can purchase option to create leverage. The payoff to purchasing an option can be much greater than by purchasing the underlying instrument directly. For example buying an at-the-money call option for $2 per share for a total of $200 on a security priced at $20, will lead to a 100% return on premium if the option is exercised when the underlying security's price has risen by $2, whereas buying the security directly for $20 per share, would have lead to a 10% return. The greater leverage comes at the cost of greater risk of losing 100% of the option premium if the underlying security does not rise in price.

TRADING MECHANISM
The future and option trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen based trading for Nifty futures & option and stock future& option on nationwide basis and an online monitoring and surveillance mechanism. It supports an anonymous order driven market which provides complete transparency of trading operations and operates on strict price-time priority. It is similar to that of trading of equities in the cash market segment. The NEAT F&O trading system is accessed by two type users.

The Trading Members have access to functions such as order entry, order matching, order and trade management it provides tremendous flexibility to users in terms of kinds orders that can be placed on the system. Various conditions like Good-till-day, Good till cancelled, Good-tilldate, immediate or cancel, limit/market price, stop losses can be built into order. The clearing members (CM) use the trader work station for the purpose of monitoring the trading members whom they clear the trades. Additionally, they can enter and set limits to positions, which trading member can take.

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GLOSSARY
AMERICAN STYLE OPTION An option that can be exercised at any time from inception as opposed to a European Style option which can only be exercised at expiry. Early exercise of American options may be warranted by arbitrage. European Style option contracts can be closed out early, mimicking the early exercise property of American style options in most cases.

EUROPEAN STYLE OPTION An option that can be exercised only at expiry as opposed to an American Style option that can be exercised at any time from inception of the contract. European Style option contracts can be closed out early, mimicking the early exercise property of American style options in most cases.

EXERCISE PRICE The exercise price is the price at which a call's (put's) buyer can buy (or sell) the underlying instrument. MARGIN A credit-enhancement provision to master agreements and individual transactions in which one counterparty agrees to post a deposit of cash or other liquid financial instruments with the entity selling it a financial instrument that places some obligation on the entity posting the margin. PREMIUM The cost associated with a derivative contract, referring to the combination of intrinsic value and time value. It usually applies to options contracts. However, it also applies to off-market forward contracts.

STRIKE PRICE
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The price at which the holder of a derivative contract exercises his right if it is economic to do so at the appropriate point in time as delineated in the financial product's contract.

Most Active Bank Call

Inst Type OPTSTK OPTIDX OPTIDX OPTSTK OPTSTK OPTIDX OPTIDX Exp Date 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 Underlying Bank Nifty SBIN ICICI BANK HDFC BANK YES BANK AXIS BANK AXIS BANK Option Type CA CE CE CA CA CE CE Strike Price 10800 2200.00 1000.00 2350 280.00 1200.00 1050.00 Last Price 254.00 56.00 48.00 45.85 15.40 50.40 32.00

Most Active Bank Put

Inst Type OPTSTK OPTIDX OPTIDX OPTSTK OPTSTK OPTIDX OPTIDX Exp Date 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 30-June-11 Underlying Bank Nifty SBIN ICICI BANK HDFC BANK YES BANK AXIS BANK PNB Option Type PA PE PE PA PA PE PE Strike Price 10800 2200.00 1000.00 2350 280.00 1200.00 1050.00 Last Price 210.00 54.90 48.00 37.50 12.00 36.50 25.70

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TRADERS IN OPTIONS MARKET

Hedgers: Hedgers are the traders who wish to eliminate the risk of (price change) to which they are already exposed. They make a long position on, short sell, a commodity would, therefore, stand to lose should the prices move in the adverse direction. Speculators: If hedgers are the people who wish to avoid the price risk, speculators are those who are willing to take such risk. These are the people who take positions in the market and assume risks to profit from fluctuations in prices. In fact, the speculators consume information make forecasts about the prices and put their money in these forecasts. In this process, they feed information into prices and thus contribute to market efficiency, by taking positions, they are betting that a price would go up or they are betting that it would go down. Depending on their perceptions, they may take long or short positions on futures and/or options, or may hold spread positions. Arbitrageurs: Arbitragers thrive on market imperfections. An arbitrageur profits by trading a given commodity, or other item, that sells for different prices in different markets. Thus, arbitrage involves making risk-less profit by simultaneously entering into transaction in two or more markets. Option Holder: The buyer of the option is called option holder. Option Writer: The seller of the option is called option writer. Exercise price: Excise Price is the price at which the underlying shares are bought (calls) or sold (puts) and cover a range of prices at set intervals above and below the current price of the stock or index.

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Premium: Premium is the term used for the price of an option. It varies as the underlying securitys price fluctuates as well as with the passage of time. The premium is dependent on other factors including the volatility of the underlying security, dividends and interest rates. Option premiums are calculated based on models that take these factors into account and take the guesswork out of valuing options. The most common models are the Black & Scholes and the Binomial option pricing models. Leverage: Leverage is the feature of options that allows for higher returns from movements in the

underlying shares trading options rather than the underlying shares themselves. Options provide leverage because they trade for a fraction of the price of the underlying shares. Time decay: Time decay is the cost of holding an option from one day to the next. As options exist for a limited time only their value diminishes as the expiry approaches in much the same way as insurance policies lose value as they come to an end. Time decay is quantifiable and is known by the Greek term "theta". Time value of an option: Time value of an option is the value over and above intrinsic value that the market places on the option. It can be considered as the value of the continuing exposure to the movement in the underlying product price that the option provides. The price that the market puts on this time value depends on a number of factors: time to expiry, volatility of the underlying product price, risk free interest rates and expected dividends. Intrinsic value of an option:

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The intrinsic value of an option is the amount an option holder can realize by exercising the option immediately. Intrinsic value is always positive or zero. An out- of-the-money option has zero intrinsic value. Intrinsic value of in-the-money call option = underlying product price - strike price. Intrinsic value of in-the-money put option = strike price - underlying product price. Volatility Volatility is the tendency of the underlying securities price to fluctuate up and down. It reflects a price changes magnitude; it does not imply a bias toward price movement in one direction or the other. Thus, it is a major factor in determining an options premium. The higher the volatility of the underlying stock, the higher the premium because there is a greater possibility that the option will move in-the- money. Generally, as the volatility of an underlying stock increases, the premiums of both calls and puts overlying that stock increase, and vice versa. Long: "Long" describes a position (in stock and/or options) in which you have purchased and own that security in your brokerage account. For example, if you have purchased the right to buy 1000 shares of a stock, and are holding that right in your account, you are long a call contract. If you have purchased the right to sell 1000 shares of a stock, and are holding that right in your brokerage account, you are long a put contract. If you have purchased 1,000 shares of stock and are holding that stock in your brokerage account, or elsewhere, you are long 1,000 shares of stock. When you are long an equity option contract:

contract Short: With respect to this section's usage of the word, short describes a position in options in which you have written a contract (sold one that you did not own). In return, you now have the obligations inherent in the terms of that option contract. If the owner exercises the option, you
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have an obligation to meet. If you have sold the right to buy 1000 shares of a stock to someone else, you are short a call contract. If you have sold the right to sell 1000 shares of a stock to someone else, you are short a put contract. When you write an option contract you are, in a sense, creating it. The writer of an option collects and keeps the premium received from its initial sale.

When you are short (i.e., the writer of) an equity option contract: You can be assigned an exercise notice at any time during the life of the option contract. All option writers should be aware that assignment prior to expiration is a distinct possibility.

limited by the fact that the stock cannot fall below zero in price. Although technically limited, this potential loss could still be quite large if the underlying stock declines significantly in price. In-the money option: An in-the-money option (ITM) is an option that would lead to a positive cash flow to the holder if it were excised immediately. A call option on the index is said to be in-the-money when the current index stands at a higher level than the strike price (i.e. spot price > strike price). In the case of a put, the put is at 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 cash flow if it were excised immediately. An option index is at the money when the current index equals to strike price (i.e. spot price = strike price). Out-the money option: An in-the-money option (ITM) is an option that would lead to a negative cash flow to the holder if it were excised immediately. A call option on the index is said to be out-the-money when the current index stands at a level, which is than the strike price (i.e. spot price < strike price). In the case of a put, the put is at OTM if the index is above the strike price.

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ANALYSIS AND INTERPRETATION

OPTION STRATEGIES

1. 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 M) call of the same underlying stock/index and expiration data. 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.

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When to Use: The investor thinks Example that the underlying stock/ index will Suppose nifty is at 4500 in May. An investor, Mr. experience very high levels of A, executes a Long Strangle by buying an Rs.4300 volatility in the near term. Nifty Put for a premium of Rs.23 and an Rs4700 Nifty Call for Rs.43. The net debit taken to enter the trade is Rs.66, Which is also his maxi mum Risk : Limited to the initial premium possible loss. paid

Reward : Unlimited Strategy: Buy OTM Put + Buy OTM call Breakeven: Upper Breakeven Point = Strike Price of Long call + Net Premium Paid Lower Breakeven Point = Strike Price of Long Put- Net Premium Paid Nifty Index Current Value Buy call Option Strike Price (Rs.) 4500 4700

Mr. A pays Premium (Rs.) Break Even Pont (Rs.) Buy Put Option Strike Price (Rs.)

43 4766 4300

Mr. A pays Premium (Rs.)

23

Break Even Point (Rs.) 4234

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The Payoff Schedule

On expiry Nifty closes at 3800 3900 4000 4100 4200 4300 4400 4500 4600 4700 4766 4800 4900 5000 5100 5200 5300

Net Payoff from Put Net Payoff from Call Purchased (Rs.) purchased (Rs) 477 377 277 177 77 43 -23 -23 -23 -23 -23 -23 -23 -23 -23 -23 -23 -43 -43 -43 -43 -43 -43 -43 -43 -43 -43 23 57 157 257 357 457 557

Net Payoff (Rs.) 434 334 234 134 34 0 -66 -66 -66 -66 0 34 134 234 334 434 534

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Example:
Nifty Index Trading at 3200

Purchased Put option of nifty slightly out of money (OTM) at strike price of 3000 at a premium of Rs. 40.80 where lot size is 50.

Again simultaneously purchasing 1 lot of call option of nifty slightly out of money (OTM) at strike price is 3400 at a premium of Rs.44.25 where lot size is 50. When Nifty Index reached at 3410 the premium on purchase of nifty call option (Strike price = 3400) increased from Rs.45.90 to Rs.111 and simultaneously the premium price of put option nifty decreased from Rs.40.80 to Rs.16.5.

Calculation:

Call option (Strike price = 3400):

(111- 44.25) * 50

3337.5

Put option (Strike price = 3000):

(16.5 - 40.80) * 50

(1215)

PROFIT (Rs)

2122.5

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2. BULL CALL SPREAD STRATEGY: BUY CALL OPTION, SELL CALL OPTION

A buy 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 inthe-money while the call with the higher strike price is out-in-the money. Both calls 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.

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When to use: investor is Example : moderately bullish. Mr. XYZ buys a Nifty Call with a strike price Rs.4100 at a premium of Rs.170.45 and he sells a Nifty call option with a strike price Rs.4400 at a premium of Rs.35.40. the Risk: Limited to any net debit here is Rs.135.05 which is also his maximum initial premium paid in loss. establishing the position. Strategy: Buy a call with a lower strike (ITM) + Maximum loss occurs Sell a call with a higher strike (OTM) where the underlying falls to the level of the lower strike or below. Nifty index Current Value 4191.10 Reward: Limited to the difference between the two strikes minus net premium cost. Maximum profit occurs where the underlying rises to the lever of the higher strike or above. Buy ITM Call Strike Price(Rs.) Option Mr. XYZ Pays Sell OTM Call Option Mr. XYZ Receives Break-Even- point(BEP): Strike Price of Purchased call + Net Debit Paid Premium (Rs.) Strike Price (Rs.) 170.45 4400 4100

Premium (Rs.)

35.40

Net Premium Paid (Rs.) Break Even Pont (Rs.)

135.05

4235.05

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The Payoff Schedule On expiry Nifty closes at 3500.00 3600.00 3700.00 3800.00 3900.00 4000.00 4100.00 4200.00 4235.05 4300.00 4400.00 4500.00 4600.00 4700.00 4800.00 4900.00 5000.00 5100.00 5200.00 Net Payoff from call Net Payoff from Call Purchased (Rs.) sold (Rs) -170.45 -170.45 -170.45 -170.45 -170.45 -170.45 -170.45 -70.45 -35.40 29.55 129.55 229.55 329.55 429.55 529.55 629.55 729.55 829.55 929.55 35.40 35.40 35.40 35.40 35.40 35.40 35.40 35.40 35.40 35.40 35.40 -64.60 -164.60 -264.60 -364.60 -464.60 -564.60 664.60 764.60 Net Payoff (Rs.) -135.05 -135.05 -135.05 -135.05 -135.05 -135.05 -135.05 -135.05 0 64.95 164.95 164.95 164.95 164.95 164.95 164.95 164.95 164.95 164.95

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The Bull Call Spread Strategy has brought the breakeven point down (if only the Rs.4100 strike price Call was purchased the breakeven point would have been Rs.4270.45) reduced the cost of the trade (if only the Rs.4100 strike price call was purchased the cost of the trade would have been Rs.170.45), reduced the loss on the trade (if only the Rs.4150 strike price Call was purchased the loss would have been Rs.170.45 i.e. the premium of the Call purchased). However, the strategy also has limited gains and is therefore ideal when markets are moderately bullish.

Example:
Nifty Index Trading at 3200 Purchased 1 lot of call option of nifty slightly in the money (ITM) at strike price of 3200 at a premium of Rs.126.50 where lot size is 50. Again simultaneously selling 1 lot of call option of nifty out of money (OTM) at strike price is 3400 at a premium of Rs.111 where lot size is 50. When Nifty Index reached at 3410 the premium on purchase of nifty call option (Strike price = 3200) increased from Rs.126.50 to Rs.250 and simultaneously the premium price of put option nifty decreased from Rs.111 to Rs.44.25.

Calculation: Call option (Strike price = 3200): (250- 126.50) * 50 = 6175

Put option (Strike price = 3000):

(44.25 - 111) * 50

(3337.5)

PROFIT

2837.5

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3. SYNTHETIC LONG CALL: BUY STOCK, BUY PUT

In this strategy, we purchase a stock since we fill 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 certain 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 of the price rise. In case the price of the stock falls, exercise the put option (remember put is right to sell). You have caped 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. Here you have taken an exposure to an 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 moment. 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 moment in the underlying stock.

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When to use: when ownership is desired of stock yet investor is concerned about near term down side risk. The outlook is conservatively bullish

Example: Mr. XYZ IS BULLISH ABOUT ABC Ltd. Stock. He Buys ABC Ltd. At Current Market price of ABC Ltd. (his Risk), he buys an ABC Ltd. Put option with a strike price Rs.3900 (OTM) at a premium of RS. 143.80 expiring on 31st July. Strategy : Buy Stock + Buy Put Option Buy Stocks (Mr. XYZ pays ) Current market price of ABC Ltd .(RS) 4000

Risk: Losses limited to stock price + put premium put Strike Price.

Reward : Profit potential is unlimited Put option Break-even Point : Put Strike + put Premium + Stock Price Put Strike Price Strike Price (Rs) 3900

Buy Put (Mr. XYZ pays )

Premium (Rs)

143.80

Break Even Point 4143.80 (Rs) (Put Strike Price + Put Premium + Stock Price Put Strike Price )*

* Break Even is form the point of view of Mr. XYZ. He has to recover the cost of the put option purchase price+ the stock price break even.

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Example:
ABC LTD. Is trading at Rs.4000 Buy 100 shares of the Stock at Rs.4000 Buy 100 Put Options with Price of Rs.3900 at a premium of Rs.143.80 per put.

Net Debit (payout)

Stock Bought + Premium Paid Rs.4000 + Rs.143.80 Rs.4,143.80/-

Maximum Loss

Stock Price + Put Premium Put Strike Rs.4000 + Rs.143.80 Rs.3900 Rs.243.80

Maximum Gain

Unlimited (as the stock rises)

Breakeven

Put Strike + Put Premium + Stock Price Put Strike Rs.3900 + Rs.143.80 + Rs4000 Rs.3900 = Rs.4143.80

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The Pay off schedule

ABC Ltd. closes at (Rs.) on expiry) 3400.00 3600.00 3800.00 4000.00 4143.80 4200.00 4400.00 4600.00 4800.00

Payoff from the Stock (Rs.) -600.00 -400.00 -200.00 0 143.80 200.00 400.00 600.00 800.00

Net Payoff from the Put Option (Rs.) 356.20 156.20 -43.80 -143.80 -143.80 -143.80 -143.80 -143.80 -143.80

Net Payoff (Rs.)

-243.80 -243.80 -243.80 143.80 0 56.20 256.20 456.20 656.20

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ANALYSIS:
This is a low risk strategy. This is a strategy which limits the loss in case of fall in market but the potential profit remains unlimited when the stock price rises. A good strategy when you buy a stock for medium or long term, with the aim of protecting any downside risk. The pay-off resembles a Call Option buy and is therefore called as Synthetic Long Call

Example:

Nifty Index Trading at 3200

Purchased 1 lot of nifty futures at Rs.3219 where lot size is 50.

Again simultaneously purchasing 1 lot of put option of nifty out of money (OTM) at strike price is 3000 at a premium of Rs.40.80 where lot size is 50.

When Nifty Index reached at 3410 the premium price of put option nifty decreased from Rs.40.80 to Rs.16.50. Calculation:

NIFTY FUTURES

(3410- 3219) * 50

9550

Put option (Strike price = 3000):

(16.5 40.80) * 50

(1215)

PROFIT
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Rs.8335
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4. BEAR CALL SPREAD STRATEGY: SELL ITM CALL, BUY OTM CALL

The Bear Call Spread strategy can be adopted when the investor fells 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 option while simultaneously selling in the money (ITM) call options on the same underlying stock index. This strategy call also be done with both OTM calls with the Call purchased being higher OTM strike than the Call sold. If the stock/ index fall both Calls will expire worthless and the investor can retain the net credit. If the stock/index rise 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 loss. The maximum loss is the difference in strikes less the net credit received. Let us understand this with an example.

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When to use: When Example: the Investor is mildly Mr. XYZ is bearish on Nifty. He sells an ITM call option on with strike price of Rs.2600 at a premium of Rs.154 and buys an OTM call option bearish market with strike price Rs.2800 at a premium of Rs.49

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.

Strategy: Sell a Call with lower strike (ITM) + Buy a Call with a higher strike (OTM) Nifty index Current Value 2694 Sell ITM Call Strike Price (Rs.) 2600 Option Mr. XYZ Premium (Rs.) 154 Receives Buy OTM Call Strike Price (Rs.) 2800 Option Mr. XYZ pays Premium (Rs.) 49 Net premium received (Rs.) Break (Rs.) Even 105

Break Even Point: Lower Strike + Net credit

Point 2705

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On expiry Nifty Closes at 2100 2200 2300 2400 2500 2600 2700 2705 2800 2900 3000 3100 3200 3300

Net Payoff from Call Sold (Rs.) 154 154 154 154 154 154 54 49 -46 -146 -246 -346 -446 -546

Net Payoff from Call bought (Rs.) -49 -49 -49 -49 -49 -49 -49 -49 -49 51 151 251 351 451

Net Payoff (Rs.)

105 105 105 105 105 105 5 0 -95 -95 -95 -95 -95 -95

The strategy earns a net income for the investor as well as limits the downside risk of a Call sold.

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5. 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 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 price/ index fall. The both Puts will have the effect of capping the investors 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 of 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.

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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

Example: Nifty is presently at 2694. Mr. XYZ expects Nifty to fall. He buys one Nifty ITM Put with a strike price Rs.2800 at a Premium of Rs.132 and sells one Nifty OTM Put with strike price Rs.2600 at a premium Rs.52

Strategy: Buy a Put with a higher strike (ITM) + SELL A PUT with a lower strike (OTM) Nifty index Current Value 2694 Buy ITM Put Option Mr. XYZ pays Sell OTM Put Option Mr. XYZ receives Strike Price (Rs.) Premium (Rs.) Strike Price (Rs.) Premium (Rs.) 2800 132 2600 52

Net Premium Paid (Rs.) 80 Break Even Point (Rs.) 2720

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The payoff schedule On expiry Nifty Closes at 2200 2300 2400 2500 2600 2720 2700 2800 2900 3000 3100 Net Payoff from Call Net Payoff from Call Net Payoff (Rs.) Sold (Rs.) bought (Rs.) 468 368 268 168 68 -52 -32 -132 -132 -132 -132 -348 -248 -148 -48 52 52 52 52 52 52 52 120 120 120 120 120 0 20 -80 -80 -80 -80

The Bear Put Spread Strategy has raised the breakeven point (if only the Rs.2800 strike price Put was purchased the breakeven point would have been Rs.2668), reduced the cost of the trade (if only the Rs.2800 strike price Put was Purchased the cost of the trade would have been Rs.132), reduced the loss on the trade (if only the Rs.2800 strike price Put was purchased the loss would have been Rs.132 i.e. the premium of the Put purchased. However, the strategy also has limited gains and is therefore ideal when markets are moderately bearish.

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FINDINGS
From the report we come to know several things about Derivatives Market. The Derivatives market is developing in India. It has great future as several measures are being taken to develop the market. The market is dominated by few large players. These players are large brokers. About fifty percent of the business in stock market derivatives belongs to these brokers. This denotes an absence of knowledge among traders. More individual investor should come to Future and Options segment. Regulatory authority should come out with regulation which create interest for attract investor.

Factors Which Hinder the Growth of Derivatives Market in India

The first and foremost factor which hinders the growth of derivatives market in India is the minimum size of contract for futures & options contracts. This has been pegged at Rs. 2 laces by SEBI which is very high for small investors.

The second factor is, -- the initial investment required for entering into derivatives contracts. The initial margin requirement for writing options and buying or selling futures becomes very high. Also the initial margin is as high as 15 to 20 percent in case of some scrips.

Other problem in Derivatives trading is, -- the contracts have to be settled in cash only. There is no physical delivery facility available for settlement of Derivatives contracts.

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The market is dominated by few large players.

SUGGESTIONS
From the study of the findings and conclusions I have arrived at on the basis of the data collected by me and preparation of charts, I would like to give the following recommendation which will be useful for the development of derivatives market in India and also will be useful to the future investor who would like to invest on the basis of the trends in the option market. I summarize my recommendation in the following points: Option market has surpassed the cash market in terms of turnover but it much behind the turnover in developed market like USA, UK. Etc. Some steps should be taken to encourage wider participations. SEBI should strengthen its efforts to educate investor about the Derivatives Market in India along with its other programs of education investors. The contracts value of Rs. 200000/- is very high for retail investor so measures are needed to reduce that limit so that wider participation from retail investor can be encouraged.
This study reveals that most of the investors are unaware of the strateg ies followed i n o p tio n s m a rk et a n d th e a w a ren es s is lim ite d to p eo p le a t w o rk in br o k in g h o u s es a nd to those who do technical analysis. Ther efo re the inves tors have to be educated through training programs. It can be done by fo llowing ways: o By conducting seminars. o By providing more information about Deri vatives and the Stra tegies of O p tio n s o n th e c o m p a ny s w ebs ite. The appropriate O ption Strateg ies that sui ts th e market conditions sh ould be adopted based on the market i nformation and the tec hnical analysis as they are subjec t to

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m a rk et im perfectio n. T h is will h elp to d eriv e m a xim um pro fits o u t of th e po sitio ns taken for hedging or tra ding for profits.

CONCLUSION
From the report I come to know several things about Derivatives Market. The Derivatives market is developing in India. It has great future as several measures are being taken to develop the market. The market is dominated by few large players. Generally, individual investors are not having enough knowledge for derivatives market. There is unawareness regarding derivatives in case of individual. India is one of the most successful developing countries in terms of a vibrant market for derivatives. This episode reiterates the strengths of the modern development of Indias securities markets, which are based on nationwide market access, anonymous electronic trading, and a predominantly retail market. As with most of the financial sector innovations of the last decade, individuals have displayed intellectual capacity and a speed of exploiting new ideas which has just not been found with finance companies. Internationally, banks and mutual funds are major players on the equity derivatives market. The new world of the equity market is working out very well: no badla, no weekly settlement, rolling settlement, futures, and options.

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 I have found the there exist a positive relationship between the Put-Call Open Interest Ratio and Cash Market Price. It means that rise in Put-Call Open Interest Ratio shows bearish outlook over the Cash Market Price. It is desirable to have Put-Call Open Interest Ratio below 0.7. I cannot define the exact relationship between the Put-Call Volume Ratio and Cash Market Price.

BIBLIOGRAPHY
For preparation of this project report we have collected information from various sources like visiting various websites, referring to journals, publications. For gathering information we have also referred to various books on Futures & Options written and published by different authors and publications. Following are some of the major sources we have referred to for getting information:

Web Sites Referred:

www.nseindia.com www.bseindia.com www.derivativesindia.com www.ITI.com

Books Referred:
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 Future And Options By: N.D. Vohra And B.R. Bagri Options And Futures In Indian Perspective By: D.C. Patwari

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