Project Report

A
PROJECT REPORT
ON
A PRAGMATIC STUDY ON VARIOUS OPTION STRATEGIES AND ITS

APPLICATION.
IN GEOJIT BNP PARIBAS FINANCIAL SERVICES LTD.
BY
NAME : SHRADHANJALI
TRIPATHY
HALL TICKET NO : 008-08-156
PROJECT SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD

OF
MASTER OF BUSINESS ADMINISTRATION 2008-2010
DEPARTMENT OF BUSSINESS MANAGEMENT
BADRUKA COLLEGE P.G CENTRE
OSMANIA UNIVERSITY
HYDERABAD - 500007
1
A PRAGMATIC STUDY ON VARIOUS
OPTION STRATEGIES AND ITS
APPLICATION.
2
DECLARATION
I hereby declare that this project report titled “A PRAGMATIC STUDY ON
VARIOUS OPTION STRATEGIES AND ITS APPLICATION” submitted by me to
the Department of Business Management, Osmania University, Hyderabad, is a bonafide
work undertaken by me and is not submitted to any university or institution for the award
of any degree/diploma certificate or published anytime before.
SHRADHANJALI TRIPATHY
Hall Ticket No: 00808156
3
ABSTRACT
This Project study discuss about the important derivative product called option and
this study explain in brief about various option strategies which is important tool that
can use by the investor for analyzing the investment portfolio to obtain detail and
valuable insight before making any investment.
The objective of the study is to know the implementation of the various kinds of
option strategies which can help in generating Income for investor under the various
market condition, so that an investor can use these option strategies as a hedging tool to
hedge the risk of loss due to the changing market condition, and to provide the protection
and profit from the changes in the value of underlying asset by knowing the uses of the
option in the financial capital market.
The descriptive study is undertaken by using the historical data of Reliance limited
from NSE SITE and then this data is used to understand the all option strategies in better
way by interperating and analyzing the data into various strategies so that to know when
to use which strategies in which market condition to hedge against the risk of loss and to
capture the market potential.
The company “GEOJIT BNP PARIBAS FINANCIAL SERVICE LTD” where the
project is undertaken for two the month period has given various recommendations based
on the study. The company has recommended – increasing the awareness of derivative
instrument among the young investor and also it suggested that there is a need to educate
the investor about this recent innovative financial instrument i.e., option (Derivative
type). So that the investor can hedge the risk by using the option contract in investment
portfolio.
4
ACKNOWLEDGEMENT
It is with great pleasure that I acknowledge the help and encouragement received from
various quarters. I’m thankful to Mr. Sriram B.K.R, Regional manager of Geojit BNP
Paribas Financial service limited, for his valuable support and at every step to carry out
this project successfully.
I would also like to thank Mrs. Sushma Madam (Internal Guide) for guiding me through
the entire project. I would also like to thank our Director Prof. Pannalal for all the
support and entire management department Badruka College P.G center for their support
throughout the entire project work.
5
INDEX
Contents Page No
Chapter 1 - Introduction 8 - 13
Objectives of study
Limitation of studies
Research Methodology
Chapter2 - Literature Review 14 - 24
Chapter 3 - Company profile 25 - 34
Chapter 4 - Theoretical framework of 35 - 130
Various option strategies,
Interpretations & Analysis
Chapter 5 - Observations, Conclusion 131 - 135
Suggestions & Bibliography
List Of Tables
TABLE NO PAGE NO
TABLE 1.1 & 1.2 45 – 46
TABLE 2.1 & 2.2 48
TABLE 3.1 &3.2 52 - 53
TABLE 4.1 & 4.2 56 - 57
TABLE 5.1 & 5.2 60 - 61
TABLE 6.1 & 6.2 64 - 65
TABLE 7.1 &7.2 67 - 68
TABLE 8.1 & 8.2 70 - 71
TABLE 9.1& 9.2 74 - 75
TABLE 10.1 & 10.2 79
TABLE 11.1 & 11.2 83 - 84
TABLE 12.1 & 12.2 88 - 89
TABLE NO PAGE NO
TABLE 13.1 & 13.2 92 - 93
TABLE 14.1 & 14.2 96 - 97
6
TABLE 15.1 & 15.2 100 - 101
TABLE 16.1 & 16.2 104 - 105
TABLE 17.1 & 17.2 108 - 109
TABLE 18.1 & 18.2 112 - 113
TABLE 19.1 & 19.2 117 - 118
TABLE 20.1 & 20.2 121 - 122
TABLE 21.1 & 21.2 125 - 126
TABLE 22.1 & 22.2 129 - 130
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CHAPTER 1
 Introduction.
 Objectives of the study.
 Limitation of the study.
 Research Methodology.
8
Introduction:
The derivative is very innovative financial instrument and it was introduced in June
2000 & June 2001 and since then there is a remarkable growth in derivative instrument.
The No of traded derivative contract has also increased under the Stock option and
stock futures over a period of time. They introduced in year July 2001 and Nov 2001 and
from then Stock option earned the turnover of Rs.506065.18 whereas the turnover for
stock futures in year 2009-2010 is Rs. 5195246.64 which shows that the derivative
instrument is increasingly traded in the Indian capital market.
The above given figure shows that there is increasing use of derivative product in
the capital market which enhances the financial sector earning and also more and more
attractive investment product is available to the investor according to their needs. The
increasing role of derivative has result in the tailoring the investment as per the needs
and requirement of investor which ultimately shows the growth of derivative segment in
Indian financial sector.
Options form an important class of derivative which have standardized contract
features and trade on public exchanges, facilitating trading among large number of
investors. They Provide settlement guarantee by the Clearing Corporation thereby
reducing counterparty Risk. Options can be used for hedging, taking a view on the future
direction of the market, For arbitrage or for implementing strategies which can help in
generating income for Investors under various market conditions. So by seeing the
increasing growth of the option contract in the financial market and to make investor
aware about this latest innovative derivative instrument and its usage the project has
undertaken on the topic ‘’an empirical study on various option strategies and its
application’’
9
Options are the instruments that can be used to hedge as well as to speculate.
Different options can be combined to create different synthetic instruments which will
match the risk and return profile of the option user. Options can also be used to create
portfolios with unique features capable of achieving investment objectives not attainable
with other derivatives products. In this part, we will present different intervention
strategies which can be used either for hedging or for speculation.
Many option strategies can be employed by investors in their assets and
liabilities management decisions. For instance, an investor can purchase or sell either a
call option or a put option alone (naked option strategy), trade the option with underlying
assets at the same time (hedging strategies), or combine calls and puts in one transaction
(combination strategies). All the above strategies describe the alternatives available to
hedge a long or a short position with single option; there are many alternatives that can
be created by combining options either for the purchase of hedging or for the purpose of
speculation. Therefore this project study has done keeping all this view point.
10
OBJECTIVES OF THE STUDY
 To know the implementation of various option strategies which can help in
generating income for the Investors under various market conditions.
 To study the various Option strategies, so that it can be used for hedging against
the risk.
 To provide the protection and profit from changes in the value of underlying asset
by knowing the uses of option in the financial market.
LIMITATION OF THE STUDY
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 The study has been conducted exclusively on the basis of secondary data.
 The project is restricted only to option stock.
 Analysis of this project Report is based on the historical data and as such
cannot be guarantying any future movement of the stock.
 Due to the limitation of time i.e. 2 month the study could not up to its fullest
extent.
REASEARCH METHODOLOGY
For the purpose of preparing this project secondary data is collected & used.
12
Followings are the ways in which information was gathered for successful preparation of
project report.
 Price of option stock for period of 2008-2009.
 National stock exchange site.
 Going through related magazine, details & text Books.
Scope of the study
 The study for the project is done only for the year of 2008-2009 & hence analysis &
result will only confine to that period.
 The study has made limited to the study of NSE OPSTK only.
 The main purpose of this project report is to give reader on overview of the various
option strategies used by the investor to avoid risk & earn maximum income.
CHAPTER 2
13
Literature Review
 Derivatives instrument
 Introduction of derivative instrument in financial
market.
 Role of financial derivative in business and finance.
14
DERIVATIVE
The derivative itself is merely a contract between two or more parties. Its value is
determined by fluctuations in the underlying asset. The most common underlying asset
includes stocks, bonds, commodities, currencies, interest rates and market indexes. Most
derivatives are characterized by high leverage.
DERIVATIVE INSTRUMENT
Derivatives are a financial contracts, financial instruments, whose prices are derived
from the price of something else (knowing as underlying).. the underlying price on which
a derivative is based on asset.(e.g., commodities, equities(stock), residential mortgages,
commercial real estates , loans, bonds), An Index(e.g., interest rates, exchange rates,
stock market indices, consumer price index(CPI).
Derivatives trading in the stock market have been a subject of enthusiasm of research in
the field of finance the most desired instruments that allow market participants to
manage risk in the modern securities trading are known as derivatives. The derivatives
are defined as the future contracts whose value depends upon the underlying assets. If
derivatives are introduced in the stock market, the underlying asset may be anything as
component of stock market like, stock prices or market indices, interest rates, etc. The
main logic behind derivatives trading is that derivatives reduce the risk by providing an
additional channel to invest with lower trading cost and it facilitates the investors to
extend their settlement through the future contracts. It provides extra liquidity in the
stock market.
In recent past, the volatility of stock returns has been a major topic in finance
literature. Generally, volatility is considered as a measurement of risk in the stock market
return and a lot of discussions have taken place about the nature of stock return volatility.
Therefore, understanding factors that affect stock return volatility is an imperative task in
many ways. Stock prices and their volatility add to the concern of attention in the stock
15
market, especially in India. The volatility on the stock exchanges may be thought of as
having two components: The volatility arising due to information based price changes
and Volatility arising due to noise trading/ speculative trading, i.e., destabilizing
volatility. As a concept, volatility is simple and intuitive.
Derivatives’ trading has been started in Indian stock market with the theme that it would
reduce the Volatility. Empirical researchers have tried to find a pattern in stock return
movements or factors determining these movements. Nath (2003) Shenbagaraman
(2003) Mayhew (2000) Raju and Karande (2003) Rahman (2001) have examined
empirically the impact of derivatives trading on the spot market volatility. The majority
of studies have employed the standard ARCH or GARCH model to examine volatility
shifting. Mostly the findings are supporting the hypothesis that introduction of
derivatives has reduced the stock market volatility. In the case of Indian stock market,
the results are the same, but the studies are based on the shorter period.
Extending the studies, this research article examines the impact of introduction of
financial derivatives on cash/spot market volatility in Indian stock market (an emerging
stock market) using a larger period as well as It examines the impact of trading in major
derivatives products including index futures, Derivatives trading in the stock market
have been a subject of enthusiasm of research in the field of finance the most desired
instruments that allow market participants to manage risk in the modern securities
trading are known as derivatives. The derivatives are defined as the future contracts
whose value depends upon the underlying assets. If derivatives are introduced in the
stock market, the underlying asset may be anything as component of stock market like,
stock prices or market indices, interest rates, etc. The main logic behind derivatives
trading is that derivatives reduce the risk by providing an additional channel to invest
with lower trading cost and it facilitates the investors to extend their settlement through
the future contracts. It provides extra liquidity in the stock market.
16
INTRODUCTION OF FINANCIAL DERIVATIVE
The global liberalization and integration of financial markets has created new investment
opportunities, which in turn require the development of new instruments that are more
efficient to deal with the increased risks. Institutional investors who are actively engaged
in industrial and emerging markets need to hedge their risks from these internal as well
as cross-border transactions. Agents in liberalized market economies who are exposed
to volatile commodity price and interest rate changes require appropriate hedging
products to deal with them. And the economic expansion in emerging economies
demands that corporations find better ways to manage financial and commodity risks.
The most desired instruments that allow market participants to manage risk in
the modern securities trading are known as derivatives. The main logic behind the
derivatives trading is that derivatives reduce the risk by providing an additional channel
to invest with lower trading cost and it facilitates the investors to extend their settlement
through the future contracts. It provides extra liquidity in the stock market. They
represent contracts whose payoff at expiration is determined by the price of the
underlying asset—a currency, an interest rate, a commodity, or a stock.
Derivatives are traded in organized stock exchanges or over the counter by
derivatives dealers. The issue of the impact of derivatives trading on stock market
volatility has received considerable attention in recent years in India, particularly after
the stock market crash of 2001. Derivative products like futures and options on Indian
stock markets have become important instruments of price discovery, portfolio
diversification and risk hedging in recent times. In the last decade, many emerging and
transition economies have started introducing derivative contracts.
The history of derivatives may be new for developing countries but it is old for
the developed countries. The history of derivatives is surprisingly longer than what most
17
people think. The derivative contracts were done not formally in the old times in the
informal sectors. The advent of modern day derivative contracts is attributed to the need
for farmers to protect themselves from any decline in the
price of their crops due to delayed monsoon, or overproduction.
The first derivative as 'futures' contracts were introduced in the Yodoya rice
market in Osaka, Japan around 1650. The contracts were evidently standardized
contracts, like today's futures. The commodity derivative market has been functioning in
India since the nineteenth century with organized trading in cotton through the
establishment of Cotton Trade Association in 1875. Exchange traded financial
derivatives were introduced in India since June 2000 at the two major stock exchanges,
NSE and BSE. There are various contracts (Index futures, Stock futures, Index options,
Stock options, interest rate futures, currency options) currently traded on these
exchanges. (Shenbagaraman 2003).
ROLE OF FINANCIAL DERIVATIVE
Derivatives may be traded for a variety of reasons. Derivatives enable a trader to
hedge some pre-existing risk by taking positions in derivatives markets that offset
potential losses in the underlying or spot market. In India, most derivatives users
describe themselves as hedgers and Indian laws generally require that derivatives be used
for hedging purposes only. Another motive for derivatives trading is speculation (i.e.
taking positions to profit from anticipated price movements). In practice, it may be
difficult to distinguish whether a particular trade was for hedging or speculation, and
active markets require the participation of both hedgers and speculators.
It is argued that derivatives encourage speculation, which destabilizes the spot
market. The alleged destabilization takes the form of higher stock market volatility. The
reason behind it is informational effect of the futures trading. Futures trading can alter the
available information for two reasons: first, futures trading attract additional traders in the
market; second, as transaction costs in the futures market are lower than those in the spot
18
market, new information may be transmitted to the futures market more quickly. Thus,
future markets provide an additional route by which information can be transmitted to the
spot markets and therefore, increased spot market volatility may simply be a consequence
of the more frequent arrival and more rapid processing of information.
Raju and Ghosh (2004) have expressed view for the consideration of volatility in the
Indian stock market as tools of analysis of risk factors. Stock prices and their volatility
add to the concern of attention. The growing linkages of national markets in currency,
commodity and stock with world markets and existence of common players, have given
volatility a new property – that of its speedy transmissibility across markets.
Among the general public, the term volatility is simply synonymous with risk. In
their view, high volatility is to be deplored, because it means that security values are not
dependable and the capital markets are not functioning as well as they should. Merton
Miller (1991) the winner of the 1990 Nobel Prize in economics - writes in his book
"Financial Innovation and Market Volatility" …. “By volatility public seems to mean
days when large market movements, particularly down moves, occur. These precipitous
market wide price drops cannot always be traced to a specific news event.... The public
takes a more deterministic view of stock prices; if the market crashes, there must be a
specific reason.” (Cited in Raju and Ghosh 2004).
The volatility on the Indian stock exchanges may be thought of as having two
components: The volatility arising due to information based price changes and Volatility
arising due to noise trading/ speculative trading, i.e., destabilizing volatility. As a
concept, volatility is simple and intuitive.
In a large scale, the success of derivatives trading will depend on the choice of
products to be traded in the markets. The popularly traded and usual types of derivatives
are futures and options. The products to be traded in the stock markets need to have the
following characteristics which are mentioned by Tsetsekos Varangis (2000):
19
......a sufficiently higher as well as lower level of price volatility to attract hedgers
or speculators, a significant amount of money for speculative motive at a certain level of
risk; a significant number of domestic market participants—and possibly buyers and
sellers from abroad; a large number of producers, processors, and banks interested in
using derivatives contracts (that is, enough speculators to provide additional liquidity);
and a weak correlation between the price of the underlying asset and the price of the
already-traded derivatives contract(s) in other exchanges (basis risk).
Introduction of derivatives in the Indian capital market was initiated by the
Government following L C Gupta Committee Report on Derivatives in December 1997.
The report suggested the introduction of stock index futures in the first place to be
followed by other products once the market matures. Following the recommendations
and pursuing the integration policy, futures on benchmark indices (Sensex and Nifty 50)
were introduced in June 2000. The policy was followed by introduction of index options
on indices in June 2001, followed by options on individual stocks in July 2001. Stock
futures were introduced on individual stocks in November, 2001 (Nath 2003)
By definition, derivatives are the future contracts whose value depends upon the
underlying assets. When derivatives are introduced in the stock market, the underlying
asset may be anything as component of stock market like, stock prices or market indices,
interest rates, etc. Derivatives products are specialized contracts which signify an
agreement or an option to buy or sell the underlying asset to extend up to the maturity
time in the future at a prearranged price.
Only futures and options are used in this analysis, so these are introduced in brief.
Futures: A futures contract is an agreement between two parties to buy or sell an asset at
a certain time in the future at a certain price. Presently Index futures on S&P CNX
NIFTY and CNX IT, Stock futures on certain specified Securities and Interest Rate
Futures are available for trading at NSE. All the futures contracts are settled in cash. A
20
futures contract is a forward contract which trades on an exchange. Futures markets
feature a series of innovations in how trading is organized. (Shah Thomas 2000)
Options: An Option is a contract which gives the right, but not an obligation, to buy or
sell the underlying at a stated date and at a stated price. While a buyer of an option pays
the premium and buys the right to exercise his option, the writer of an option is the one
who receives the option premium and therefore obliged to sell/buy the asset if the buyer
exercises it on him.
The above description about the derivatives creates a research problem that need
be reported. What is the impact of derivatives trading on the stock market risk and return
in practice? The theoretical literature on derivatives trading is of the view that derivatives
trading increase the efficiency of the stock market through minimizing the risk, but the
opposite effect may also be caused by derivative.
FUNCTIONS OF DERIVATIVE MARKET:
The derivative market has a crucial role to play in financial market and has following
economic function.
 RISK TRANSFER: The derivative redistributes the risk between market players
and is useful in risk management. Derivative instruments do not involve any risk
on themselves.
 PRICE DISCOVERY: Derivative market is risk to react and thus assist n better
price discovery. Transaction cost is lower in the markets than in spot market.
 MARKET COMPLETION: Derivative market adds to completeness of market.
A market would be complete if instrument or securities may be created which can
provide a cover against all the possible adverse outcomes.
21
TYPES OF DERIVATIVES
Broadly, the derivatives can be classified as follows.

Derivatives
Options Future Swap Forwards

s s
Put Call Commodit Security Interest Rate Currency Rate
1. OPTION:
Options are the legal contracts giving their owner the right, but not the obligation,
to buy or sell something at a predetermined price. In the securities industries industry,
options are marketable contracts entitling their owner to buy or sell a specific quantity of
a particular security at a fixed price within a predetermined period. The per specified
price at which an option can be exercised is called exercise price or contract price or
strike price.
OPTIONS TYPES: Options are of two types :
 Call option:
 Put option:
22
2. FUTURES:
Futures contracts are an agreement to buy and sell an asset on or before a future
date at a price specified today. A futures contract is a standardized contract written by a
clearing house that operates exchanges where the contract can be bought and sold.
FUTURES TYPES: Futures are of two types
 Commodities
 Securities
3. FORWARD:
The contract is defined as a contract in which a seller agrees to deliver to a buyer
sometime in future. They are privately negotiated and are not exchange traded or
standardized. There is no margin paid over between the counter parties, only a settlement
on the agreed date.
4. SWAPS:
The swaps literally mean exchange. Swaps have been defined variously as,
A. A transaction in which two parties agree to exchange a predetermined series of
payments over time.
B. An agreement between two parties to exchange interest payment for a specific
maturity on an agreed upon notional amount.
C. An arrangement whereby one party exchanges one set of interest payments for
another. Example, Fixed for floating.
SWAPS TYPES: Financial swaps are broadly classified into.
 Interest rate
 Currency rate
23
An agreement between two parties to exchange a series of payments, the term of
which are predetermined can be regarded as financial swaps.
If the term provide for exchange of interest payments without involving exchange
of principal payments, it is normally referred to as interest rate swaps. If the terms
of agreement also provide for exchange of principal, which normally happens when
two currencies are involved, it is called as currency swaps.
24
CHAPTER 3
 Company profile
 Introduction of Geojit B N P Paribas
 Product & Services Branches
 Evolution of company
 Milestones of Company Geojit B N P

Paribas
 Board of director & Management
 Subsidiary company
 Overseas Joint Ventures
 Overseas Business Association
25
COMPANY PROFILE
Geojit BNP Paribas Financial Services (NSE: Geojit) Geojit BNP Paribas is a
retail financial services company in India with a growing presence in the Middle East.
The company sells a range of savings and investment products. The value-added
products and services offered range from equities and derivatives to Mutual Funds, Life
and General Insurance and third party Fixed Deposits. The needs of over 475 000 clients
are met via multichannel services - a countrywide network of 500 offices, phone service,
Customer Care centre[2] and the Internet. Geojit BNP Paribas has membership in, and is
listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
In 2007, global banking major BNP Paribas joined the company’s other major
shareholders - Mr. C.J. George, KSIDC (Kerala State Industrial Development
Corporation) and Mr. Rakesh Jhunjhunwala – when it took a stake to become the single
largest shareholder. Strategic joint ventures and business partnerships in the Middle East
have provided the company access to the large Non-Resident Indian (NRI) population in
the region. Now, as a part of the BNP Paribas global network, Geojit BNP Paribas is
positioned to further expand its reach to NRIs in 85 countries. Barjeel Geojit Securities [3]
is the joint venture with the Al Saud group in the United Arab Emirates that is
headquartered in Dubai with branches in Abu Dhabi, Ras Al Khaimah, Sharjah and
Muscat. Aloula Geojit Brokerage Company headquartered in Riyadh is the other joint
venture with the Al Johar group in Saudi Arabia. The company also has a business
partnership with the Bank of Bahrain and Kuwait, one of the largest retail banks in
Bahrain and Kuwait. At the forefront of the many fruitful associations between Geojit
BNP Paribas and BNP Paribas is their joint venture, namely, BNP Paribas Securities
India Private Limited. This JV was created exclusively for domestic and foreign
institutional clients. An industry first was achieved when Geojit BNP Paribas became the
26
first broker in India to offer full Direct Market Access (DMA) on NSE to the JV’s
institutional clients.
In the year 2000[4], the company was the first stock broker in the country to offer Internet
Trading. This was followed by integrating the first Bank Payment Gateway in the
country for Internet Trading, and many other industry firsts. Presently, clients can trade
online in equities, derivatives, currency futures, mutual funds and IPOs, and select from
multiple bank payment gateways for online transfer of funds. Strategic B2B agreements
with Axis Bank and Federal Bank enable the respective bank’s clients to open integrated
3-in-1 accounts to seamlessly trade via a sophisticated Online Trading platform. Further,
deployment of BNP Paribas’ systems and processes is already scaling up the sales of
Mutual Funds and Insurance.
PRODUCTS AND SERVICES:
The range of products and services on offer includes - Equities | Derivatives | Currency
Futures | Custody Accounts | Mutual Funds | Life Insurance & General Insurance| IPOs |
Portfolio Management Services | Property Services | Margin Funding | Loans against
Shares
BRANCHES:
With a presence in almost all the major states of India, the network of 500 offices across
300 cities and towns presently covers Andhra Pradesh, Bihar, Chhattisgarh, Goa,
Gujarat, Haryana, Jammu & Kashmir, Karnataka, Kerala, Madhya Pradesh, Maharashtra,
New Delhi, Orissa, Punjab, Rajasthan, Tamil Nadu & Pondicherry, Uttar Pradesh,
Uttarakhand and West Bengal
27
EVOLUTION OF THE COMPANY :
It all started in the year 1987 when Mr. C.J. George and Mr. Ranajit Kanjilal founded
Geojit as a partnership firm. In 1993, Mr.Ranajit Kanjilal retired from the firm and
Geojit became the proprietary concern of Mr. C .J. George. In 1994, it became a Public
Limited Company named Geojit Securities Ltd. The Kerala State Industrial Development
Corporation Ltd. (KSIDC), in 1995, became a co-promoter of Geojit by acquiring a 24
percent stake in the company, the only instance in India of a government entity
participating in the equity of a stock broking company. The year 1995 also saw Geojit
being listed on the leading regional stock exchanges. Geojit listed at The Stock
Exchange, Mumbai (BSE) in the year 2000. Company’s wholly owned subsidiary, Geojit
Commodities Limited, launched Online Futures Trading in agri-commodities, precious
metals and energy futures on multiple commodity exchanges in 2003. This was also the
year when the company was renamed as Geojit Financial Services Ltd. (GFSL). The
Board consists of professional directors; including a Kerala Government nominee. With
effect from July 2005, the company is also listed at The National Stock Exchange (NSE).
Company is a charter member of the Financial Planning Standards Board of India and is
one of the largest Depository Participant (DP) brokers in the country. On 31st December
2007, the company closed its commodities business and surrendered its membership in
the various commodity exchanges held by Geojit Commodities Ltd. Global banking
major BNP Paribas took a stake in the year 2007 to become the single largest
shareholder. Consequently, Geojit Financial Services Limited has been renamed as
Geojit BNP Paribas Financial Services Ltd
28
MILESTONES:
 1986 Membership in Cochin Stock Exchange (CSE)
 1994 Becomes a Public Limited Company named Geojit Securities Ltd.
 1995 Kerala State Industrial Development Corporation Ltd.(KSIDC) acquires
24 percent equity stake
• Membership in National Stock Exchange (NSE)
• Public Issue
 1996 Launch of Portfolio Management Services with SEBI registration
 1997 Depository Participant (DP) under National Securities Depository
Limited
 1999 Membership in Bombay Stock Exchange (BSE)
 2000 BSE Listing
• 1st broking firm in India to offer online trading facility
• Commences Derivative Trading with NSE
• Integrates the 1st Bank Payment Gateway in the country for Internet
Trading
 2001 Becomes India's first DP to launch depository transactions through
Internet
• Establishes Joint Venture in the UAE to serve NRI customers
 2002 1st in India to launch an integrated internet trading system for Cash &
Derivatives segments
 2003 Geojit Commodities Limited, wholly owned subsidiary, launched
Online Futures Trading in agri-commodities, precious metals and in energy

29
futures on multiple commodity exchanges. National launch of online futures
trading in Rubber, Pepper, Gold, Wheat and Rice.
• Company renamed as Geojit Financial Services Ltd.
 2004 National launch of online futures trading in Cardamom.
 2005 NSE Listing
• Geojit Credits, a subsidiary, registers with RBI as a Non-Banking
Financial Company (NBFC)
• National launch of online futures trading in Coffee.
 2006 Charter member of the Financial Planning Standards Board of India
 2007 BNP Paribas takes a stake in the company’s equity, making it the single
largest shareholder
• Establishes Joint Venture in Saudi Arabia to serve the Saudi national and
the NRI
 2008 BNP Paribas Securities India (P) Ltd. – a Joint Venture with BNP
Paribas S.A. for Institutional Brokerage
• 1st brokerage to offer full Direct Market Access execution in India for
institutional clients
 2009 Launch of Property Services division
 Launch of online trading in Currency Derivatives Consequent to BNP Paribas
becoming the largest stakeholder in Geojit Financial Services, company is
renamed as Geojit BNP Paribas Financial Services Ltd.
ABOUT BNP PARIBAS:
BNP Paribas is the Euro zone’s leading bank in terms of deposits, and one of the 10 most
important banks in the world in terms of net banking income, equity capital and market
30
value. Furthermore, it is one of the 6 strongest banks in the world according to Standard
& Poor's. With a presence in 85 countries and more than 205,000 employees, 165,200 of
which in Europe, BNP Paribas holds key positions in its three activities: Retail banking,
Investment Solutions and Corporate & Investment Banking. The Group benefits from its
four domestic markets: Belgium, France, Italy and Luxembourg. BNP Paribas also has a
significant presence in the United States and strong positions in Asia and the emerging
markets.
BOARD OF DIRECTORS :
Name Designation
Mr. A. P. Kurian Non - Executive & Independent Chairman
Mr. C. J. George Managing Director & Chief Promoter
Mr.Alkeshkumar Sharma Non - Executive & Independent Director
Mr. Mahesh Vyas Non - Executive & Independent Director
Mr. Rakesh Jhunjhunwala Non - Executive Director)
Mr. Ramanathan Bupathy Non - Executive & Independent Director
Mr. Punnoose George Non - Executive Director
Mr. Olivier Le Grand Non - Executive Director
Non - Executive Director
Mr. Pierre Rousseau
MANAGEMENT:
Name Designation
Mr. C. J. George Managing Director
Mr. Satish Menon Director (Operations)
Mr. A. Balakrishnan Chief Technology Officer
Mr. K. Venkitesh National Head - Distribution
Mr. Stefan Groening Director (Planning and Control)
Mr. Jean-Christophe G Director (Marketing)
Mr. Binoy .V.Samuel Chief Financial Officer
Mrs. Jaya Jacob Alexander Chief of Human Resources
KEY FIGURES FOR FY2007-2008 (1ST APR.’07 TO 31ST MAR.08.)
Revenues: Rs.237.78 crores (USD 59.45 mln)
Profit After Tax: Rs.58.64 crores (USD 14.66 men)
Stock Market capitalization: Rs. 959.27 crores (USD 239.8 mln)as of 31st
Mar.’08
31
SUBSIDIARY COMPANIES
 Geojit Credits (P) Ltd. is registered with the Reserve Bank of India as a Non
Banking Finance Company. It is in the business of providing loans and
advances to clients participating in the Capital and Commodity markets by
way of Loans against security of Shares and Warehouse receipts. The
company does not accept deposits from the public.
 Geojit Technologies (P) Ltd. is a software company engaged in designing and
implementing end-to-end business solutions. BNP Paribas has taken a 35
percent stake in the company. The capital infusion will scale up the software
development and technology outsourcing business of the company. BNP
Paribas Personal Investors is extensively using Geojit Technologies for IT
development
 Geojit Financial Distribution (P) Ltd.
 Geojit Financial Management Services (P) Ltd.
 Geojit Investment Services Ltd.
 Sigma Systems International FZ LLC
OVERSEAS JOINT VENTURES
• Barjeel Geojit Securities, LLC, Dubai, is Geojit BNP Paribas’s joint venture
with the Al Saud Group. The Al Saud Group which belongs to Sultan bin Saud
Al Qassemi has diversified interests in the areas of equity markets, real estate and
trading. Barjeel Geojit is a financial intermediary and the first Indian licensed
brokerage company in UAE. It has facilities for off-line and on-line trading in the
Indian capital market and also in US, European and Far-Eastern capital markets.
It also provides Depository services and deals in Indian and International Funds.
32
An associate company, Global Financial Investments S.A.O.G provides similar
services in Oman.
• Aloula Geojit Brokerage Company, is Geojit BNP Paribas’s joint venture in
Saudi Arabia with the Al Johar Group. Saudi is home to one of the world’s
largest NRI populations. The company enables both the Saudi national and the
NRI to invest in the Saudi capital market. The NRI can also invest in the Indian
stock market and in Indian mutual funds. This joint venture makes Geojit BNP
Paribas the first Indian stock broking company to commence domestic retail
operations in any foreign country and the first foreign retail stock broker to start
domestic retail operations in the Kingdom.[9]The company executed its first trade
on the Saudi Stock Exchange on November 10th.[10]
OVERSEAS BUSINESS ASSOCIATION
• Bank of Bahrain and Kuwait (BBK), one of the largest retail banks in Bahrain &
Kuwait through its NRI-Business, and Geojit BNP Paribas entered into an
exclusive agreement in September 2007. This association provides the bank’s
sophisticated client base, the opportunity to diversify their holdings through
investments in the Indian stock market. Services offered are- Investment
Advisory, Portfolio Management, Mutual Funds, Trading in Indian Equity
Market, DEMAT and Bank account, Offline Share Transactions and PAN Card.
33
CHAPTER 4
Detail description of Various Option Strategies
OPTIONS
INTRODUCTION TO OPTIONS
OPTION TERMINOLOGY
STRATEGY 1 : LONG CALL
STRATEGY 2 : SHORT CALL
STRATEGY 3 : SYNTHETIC LONGCALL
34
STRATEGY 4 : LONG PUT
STRATEGY5 : SHORT PUT
STRATEGY 6 : COVERED CALL
STRATEGY 7 : LONG COMBO
STRATEGY 8 : PROTECTIVE CALL
STRATEGY 9 : COVERED PUT
STRATEGY10 : LONG STRADDLE
STRATEGY11 : SHORT STRADDLE.
STRATEGY12 : LONG STRANGLE
STRATEGY13 : SHORT STRANGLE
STRATEGY14 : COLLAR
STRATEGY15 : BULL CALL SPREAD STRATEGY
STRATEGY16 : BULL PUT SPREAD STRATEGY
STRATEGY17 : BEAR CALL SPREAD STRATEGY
STRATEGY18 : BEAR PUT SPREAD STRATEGY
STRATEGY19 : LONG CALL BUTTERFLY
STRATEGY20 : SHORT CALL BUTTERFLY
STRATEGY21 : LONG CALL CONDOR
STRATEGY22 : SHORT CALL CONDOR
OPTIONS:
Options are the legal contracts giving their owner the right, but not the obligation, to
buy or sell something at a predetermined price. In the securities industries industry,
options are marketable contracts entitling their owner to buy or sell a specific quantity of
a particular security at a fixed price within a predetermined period. The prespecified
price at which an option can be exercised is called exercise price or contract price or
strike price.
35
Options form an important class of derivative which have standardized contract
features and trade on public exchanges, facilitating trading among large number of
investors. They Provide settlement guarantee by the Clearing Corporation thereby
reducing counterparty Risk. Options can be used for hedging, taking a view on the future
direction of the market, For arbitrage or for implementing strategies which can help in
generating income for Investors under various market conditions. Currency option can be
defined as a contract which provides to the buyer “right but not the obligation, to buy or
sell a specific currency at a specific price (strike price), on or before any time prior to
the specified date.”Foreign currency option is a contract between two parties, in which,
one party grants the other the right to buy or sell a currency at a specified price
(exchange rate) for an upfront payment called the option premium. The counter party
assumes the obligation to sell or buy the currency at agreed exchange rate.
INTRODUCTION TO OPTIONS:
In 1973 the Chicago Board of option exchange (CBOE) began trading call option on
about two dozen stocks: no put were trader traded initially. The CBOE was America’s
first option exchange and organized secondary market for options. Trading volume
flourished, and by 1990 the CBOE has increased the number of option contracts listed to
include both puts and call on about 160 different stocks that each has several different
exercise prices and various maturities. Both the number and volume of option contracts
traded keeps growing. After this the growth in options started with the decision of
Philadelphia stock exchanges (PHLX) almost 17 years ago to list currency options & it is
generally credited with being the initiator of the dramatic growth in the product
worldwide since then. The Philadelphia stock exchange contracts gave banks the
opportunities to hedge their option books & product gained in popularity as banks started
to market options as an effective hedging tool. At the same time , bank started to provide
themselves and the over the counter (OTC) market was born. And therefore options are
traded both on OTC and on exchange.
36
The currency option provides the hedger with an advantage which is not available
under forward contract. For example if a US exporter has taken a forward contract to sell
a pound at $ 1.6500 he will receive only $1.6500 irrespective whether pound is at
$1.6000 or 1.7000. It will be an advantage if the exporter can get $1.6500 when the rate
is $1.6000 and $1.7000. It is this advantage which is available to hedger when he uses an
option contract. Option are available on many assets such as foreign exchange (e.g. $/£,
$/¥), equities (e.g. stocks and stock indices), commodities (e.g. gold. oil. Soya beans
etc.,) and future (currency, interest rates, etc.,) options are traded both on OTC and on
exchange.
The growth in options started with the decision of Philadelphia stock exchanges
(PHLX) almost 17 years ago to list currency options & it is generally credited with being
the initiator of the dramatic growth in the product worldwide since then. The
Philadelphia stock exchange contracts gave banks the opportunities to hedge their option
books & product gained in popularity as banks started to market options as an effective
hedging tool. At the same time, bank started to provide themselves and the over the
counter (OTC) market was born. And therefore options are traded both on OTC and on
exchange.
OPTIONS TYPES: Options are of two types :
 Call option: A call is an option to, that is, an option to call in shares for
purchase. Every call is a marketable contract giving its owner (or Holder or
Buyer) the option of buying 100 shares of some specific stock at a predetermined
price within a designated interval of time. The prescribed price at which an
option can be exercised is called the Exercise price or contract price or striking
price.
37
 Put option: A is an option to sell that is an option to “Put” shares to someone
else. Each put is marketable contract giving its owner (or Holder or Buyer) the
option to sell 100 shares of some stock within a fixed price at a prespecified
exercise price.
Call & Put are marketable securities that are separated from underlying assets. An option
is created whenever an option writer sells a new option to an option buyer. Three things
can be done with an option after it is created:
(1) Trade in active secondary market.
(2) Exercise it to buy or sell the underlying assets.
(3) Hold it until it matures.
The option call & put traded on listed option exchanges have various maturities
that extends to a maximum of almost of 1 year from the day of origination. Tailor- made
option covering different periods can be obtained in over-the-counter market (OTC). If
an option is not exercised before its expiration date, it matures and is unless and
worthless thereafter.
An option buyer pays an option writer a premium for granting option. After
option has been created, they can be traded at market-determined premium (or price) that
fluctuates continuously. The party who buys an option is long the option. Option writer
are said to be short the option. Option writers who own security on which a call was
written is writing a call covered; instead of writing uncovered (or naked).writing a call
covered is less risky strategy than writing uncovered.
As we have seen that the option can be exercised any time on or before the
specified period. So based on the terms of exercise of option to which a buyer is entitled
to, option can be classified into two types.
 American option: The holder of an American style option has the right to
exercise option any time until the expiry of option. The writer of American
option has ready ti meet the obligation at any time until the expiry date.
38
 European option: The buyer of European style option has the right to exercise
the option only on the expiry date. The writer of a European option will have the
obligation only on the expiration day of the option.
UNDERLYING ASSESTS :
 Index options: These options have the index as the underlying. In India, they
have a European style settlement. E.g. Nifty options, Mini Nifty options etc.
 Stock options: Stock options are options on individual stocks. A stock option
contract gives the holder the right to buy or sell the underlying shares at the
specified price. They have an American style settlement.
 Foreign currency options: Many currency option trading is now in the over-the-
counter market (OTC), but there is some exchange trading. The major exchange
for trading foreign currency option is Philadelphia stock exchange. It offers both
European & American contract on a variety of different currency. The size of one
contract depends on the currency. For example, in the case of British pound, one
contract gives the holder the right to buy or sell £31,250; in the case of the
Japanese yen, one contract gives the holder the right to buy or sell 6.25 million
yen.
 Future options: When the exchange trades on particular future contract it often
also trades options on that contract. A future option normally matures just before
the delivery period in the future contract. When a call option is exercised, the
holder acquires from the writer a long position in the underlying futures contract
plus a cash amount equal to the excess of the future price over the strike price,
When a put option is exercised, the holder acquires from the writer a Short
position in the underlying futures contract plus a cash amount equal to the excess
of the strike price over the future price.
OPTION TERMINOLOGY
39
Strike price (K): The price specified in the options contract is known as the strike
price or the exercise price.
Spot price(s): The price of an asset in a spot market.
Expiration date: The date specified in the options contract is known as the
expiration
Date, the exercise date, the strike date or the maturity.
Option price/premium: Option price is the price which the option buyer pays to
the
option seller. It is also referred to as the option premium.
Buyer of an option: The buyer of an option is the one who by paying the option
premium buys the right but not the obligation to exercise his option on the
seller/writer.
Writer / seller of an option: The writer / seller of a call/put option is the one who
receives the option premium and is thereby obliged to sell/buy the asset if the
buyer exercises on him.
In-the-money option: An in-the-money (ITM) option is an option that would
lead to a positive cash flow to the holder if it were exercised immediately. A
call option on the index is said to be in-the-money when the current index
stands at a level higher than the strike Price (i.e. spot price > strike price). If the
index is much higher than the strike price, Call is said to be deep ITM. In the
case of a put, the put is ITM if the index is below the Strike price.
At-the-money option: An at-the-money (ATM) option is an option that would
lead to zero Cash flow if it were exercised immediately. An option on the index
is at-the-money when the Current index equals the strike price (i.e. spot price =
strike price).
Out-of-the-money option: An out-of-the-money (OTM) option is an option that
would lead to a negative cash flow if it were exercised immediately. A call
40
option on the index is Out-of-the-money when the current index stands at a
level which is less than the strike Price (i.e. spot price < strike price). If the
index is much lower than the strike price, the call is said to be deep OTM. In
the case of a put, the put is OTM if the index is above the Strike price.
 Call option  Put option

In-the-money  S>K  S<K
At-the-money  S=K  S=k
Out-the-money  S<K  S>K
 Intrinsic value of an option: The option premium can be broken down into two
components - Intrinsic value and time value. The intrinsic value of a call is the
amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is
zero. Putting it another way, the intrinsic value of a call is Max [0, (St — K)]
which means the intrinsic value of a call is the greater of 0 or (St — K).
Similarly, the intrinsic value of a put is Max [0, K — St], i.e. the greater of 0 or
(K — St). K is the strike price and St is the spot price
 Time value of an option: The time value of an option is the difference between it
premium and its intrinsic value. Both calls and puts have time value. An option
that is OTM or ATM has only time value. Usually, the maximum time value
exists when the option are at ATM. The longer the time to expiration, the greater
is an option's time value, all else equal, at expiration, an option should have no
time value.
41
OPTION STRATEGIES AND THEIR INTERPRETATION AND
ANALYSIS:
Options are the instruments that can be used to hedge as well as to speculate.
Different options can be combined to create different synthetic instruments which will
match the risk and return profile of the option user. Options can also be used to create
portfolios with unique features capable of achieving investment objectives not attainable
with other derivatives products. In this part, we will present different intervention
strategies which can be used either for hedging or for speculation.
42
Many option strategies can be employed by investors in their assets and liabilities
management decisions. For instance, an investor can purchase or sell either a call option
or a put option alone (naked option strategy), trade the option with underlying assets at
the same time (hedging strategies), or combine calls and puts in one transaction
(combination strategies). All the above strategies describe the alternatives available to
hedge a long or a short position with single option; there are many alternatives that can
be created by combining options either for the purchase of hedging or for the purpose of
speculation. Each option strategy here is described below by taking data of Reliance Ltd.
Of year 2008-09.
43
STRATEGY 1 : LONG CALL
This strategy is for aggressive investors who are very bullish about the prospects
for a stock/index. Buying calls can be an excellent way to capture the upside potential
with limited downside risk. Buying a call is the most basic of all options strategies. It
constitutes the first options trade for someone already familiar with buying / selling
stocks and would now want to trade options. Buying a call is an easy strategy to
understand. When you buy it means you are bullish. Buying a Call means you are very
bullish and expect the underlying stock / index to rise in future.
When to Use: Investor is very bullish on the stock / index.
Risk: Limited to the Premium. (Maximum loss if market expires at or below the option
strike price).
Reward: Unlimited
Breakeven: Strike Price + Premium
Let’s take a live Reliance Ltd data for OPSTK-CA from 01-04-2008to 24-04-2008 to
have an easy understanding of this strategy in a better way.
DATE EXPIRY STRIKE OPEN HIGH LOW CLOSE SETTLE UNDERLYING

(2008) DATE(2008 PRICE(Rs. PRICE VALUE(Rs.)
) )
1 24 April 2310 89.00 125.00 68.00 115.00 115.00 2345

April
24 24 April 2310 260 260 260 260 0.00 2580

April
Let’s interpret the above Reliance Ltd data by using the long call strategy
44
INTERPRETATION:
Let us suppose, Investor is bullish on Reliance ltd. On 1st April 2008, He bought 1 lot of
Reliance ltd CALL OPSTK having 300 units each lot, with a strike price of Rs2310 at a
premium of Rs115, expiring on 24th April 2008. On 1st April 2008, Reliance was quoting
at Rs2345. Underlying value (RELIANCE Ltd) as on 24th April 2008 is Rs2580.
TABLE I.1
STRATEGY: LONG CALL Per unit
On 1st April 2008, Reliance (Underlying) 2345
Investor Buys OPSTK .Strike price (K) 2310

Reliance(CA)
Pays Premium (P) 115
Breakeven K+P 2425
Underlying worth on 26-03-2009(expiry) 2580
Activity Exercises OPSTK Reliance (CA) Pays 2425
Net profit Underlying Close 155

Price – Break Even
TABLE 1.2
THE PAYOFF SCHEDULE FOR INVESTOR – (per unit)
On expiry opstk Reliance closes at Net payoff from Reliance 2310 call option
(Rs) BUY
2200 -115
2300 -115
2400 - 25
2425 0
2500 75
2500 175
45
2600 275
2700 375
ANALYSIS:
The long call strategy limits the downside risk to the extent of premium, but returns, in
case of rise in the price of underlying is potentially unlimited. In the payoff schedule, it
can be seen that the investor, does not exercise his right till the spot price of the
underlying reaches at least to the level where he could reduce his loss. The investor
would like to exercise his right at Rs2400, in order to reduce his loss. At breakeven point
(Rs.2425), he would like to exercise, in order to save his premium paid & any further rise
in price will give profit to the investor. The more will be the price rise, the more will be
the profit. Loss is limited to the extent of premium paid however; Profit in this strategy is
potentially unlimited, provided the price should rise. This, being a American call option
(CA), the investor can exercise his right at any time, until the expiry date.
46
STRATEGY 2: SHORT CALL
This strategy is used by the investor who is very aggressive and he is bearish
about the stock/index. When you buy a Call you are hoping that the underlying stock /
index would rise. When you expect the underlying stock / index to fall you do the
opposite. When an investor is very bearish about a stock/ index and expects the prices to
fall, he can sell Call options. This position offers limited profit potential and the
possibility of large losses on big advances in underlying prices. Although easy to execute
it is a risky strategy since the seller of the Call is exposed to unlimited risk.
When to Use: Investor who is very aggressive and he is bearish about the stock/index..
Risk: Unlimited.
Reward: Limited to the amount of premium
Breakeven: Strike price + Premium
Let’s take a live Reliance Ltd data for OPSTK-CA from 01-03-2008 to 27-03-2008 to
have an easy understanding of this strategy

) )
1 24 March 2280 138.0 140 138.0 140.00 140.00 2306

March 0 0
24 24 March 2280 11.35 14.0 0.50 1.55 0.00 2270

March 0
Let’s interpret the above Reliance Ltd data by using the short call strategy
INTERPRETATION:
47
Let us suppose, Investor is bearish on Reliance ltd. On 3rd March 2008, He sold 1 lot of
Reliance ltd Call OPSTK having 300 units each lot, with a strike price of Rs2280 at a
premium of Rs140, expiring on 27 th March 2008. On 1st March 2008, Reliance was
quoting at Rs2306. Underlying value (RELIANCE Ltd) as on 27thMarch 2008 is Rs2270.
TABLE 2.1
STRATEGY: SHORT CALL Per unit
On 1st March 2008, Reliance (Underlying) 2306
Investor Buys OPSTK .Strike price (K) 2280

Reliance(CA)
Breakeven K+P 2420
Activity Exercises OPSTK Reliance (CA) Receives 2420
Net profit Limited to the amount 140

of premium paid.
TABLE 2.2
On expiry opstk Reliance closes at Net payoff from call option (Rs)
2150 140
2250 140
2350 70
2420 0
2550 -130
2650 -230
2750 -330
48
ANALYSIS:
The Short call strategy, an investor is bearish about the stock/index here the seller of the
option feels the underlying price of stock/index is set to fall in future. In the payoff
schedule, as the spot rises, the call option is in-the money option & writer start making
losses. The more will be the price rise, the more will be the loss. Loss Unlimited to the
extent of spot price rise however; Profit in this strategy is potentially limited to the
amount of premium paid, provided the price should fall. This, being a American call
option (CA), the investor can exercise his right at any time, until the expiry date.
STRATEGY 3: SYNTHETIC LONG CALL: BUY STOCK, BUY PUT
49
In the strategy, we purchase a stock since we fell bullish about it. But what if the
price of the stock went down. You wish you had some insurance against the price fall. So
buy a put on the stock. This gives you the right to sell the stock at a certain price which is
the strike price. The strike price can be the price at which you bought the stock (ATM
strike price) or slightly below (OTM strike price).
In case the price of the stock rises you get the full benefit of the price rise. In case
the price of the stock falls, exercise the Put Option (remember Put is a right to sell). You
have capped your loss in the manner because the Put options stop your further losses. It
is a strategy with a limited loss and (after subtracting the Put premium) unlimited profit
(from the stock price rise). The result of this strategy looks like a Call Option Buy
strategy and therefore is called a Synthetic Call!
But the strategy is not Buy Call Option (Strategy 1). Here you have taken an
exposure to an underlying stock with the aim of holding it and reaping the benefits of
price rise, dividends, bonus rights etc. and at the same time insuring against an adverse
price movement.
In simple buying of a Call Option, there is no underlying position in the stock but
is entered into only to take advantage of price movement in the underlying stock.
When to Use: When ownership is desired of stock yet investor is concerned about near-
term downside risk. The outlook is conservatively bullish.
Risk: Losses limited to Stock price + Put Premium – Put Strike price
Reward: Profit potential is unlimited.
Breakeven Point: Put Strike Price + Put Premium + Stock Price – Put Strike Price
have an easy understanding of the strategy.
50
(2008) DATE(2008) PRICE(Rs.) PRICE VALUE(Rs.)
1 Jan 31 Jan 3000 75.00 81.00 68.00 70.00 70.00 2950
31 Jan 31 Jan 3000 0.10 0.10 0.10 0.10 0.00 2478
Let’s interpret the above Reliance Ltd data by using the synthetic long call strategy
INTERPRETATION:
The Investor is bullish about Reliance. He buys 300 Shares of Reliance ltd. at current
market price of Rs2950 on 04th Jan 2008. To protect against fall in the price of Reliance
ltd. he buys put option of Reliance ltd with a strike price of Rs3000 (ITM) at a premium
of Rs100, expiring on 31 st Jan 2008. On 31 st Jan 2008, Reliance closed at Rs2478.
TABLE 3.1
51
STRATEGY:-synthetic long call = buy stock + buy put Per unit
option
Investor Buy 1. Current market price Rs2950

stock(underlyin of Reliance ltd(S).
g on 1st Jan
2008)
Buy OPSTK 2.Strike price (slightly Rs3000

Reliance(PA) ITM)
3.premium Rs100
Breakeven point 4. (2) – (3) Rs 2900

(put)
Strategy Breakeven point 5. (2) + (3) + (1) – (2) Rs3050

for Mr. Manu as he has
to recover stock price
& cost of put option
purchase price.
Net debit (payment) 6.Stock bought(1) + Rs3050

premium(3)
Max. loss (in case of price falls to 7.Stock bought(1) Rs.50

zero) +premium paid(3) –
put strike(2)
Max. Profit 8. Unlimited as the Unlimited

stock rises – put
premium.
Underlying (31 st Oct 2008) 9. Reliance ltd. 2478
Activity Loss on underlying 10. (1) – (9) 472
Mr. Manu Exercises 11. Exercise OPSTK Rs 3000

right Reliance
12.Profit on put = (4) – Rs 422

(9)
Net loss 13. (12) – (11) Rs. 50
TABLE 3.2
52
RELIANCE Payoff from the Net payoff from the put Net payoff (Rs)
Ltd. Closes at stock(Rs) option (Rs).
(Rs) on expiry.
Close price – stock (Strike price) – (premium +
price. close price) till break even.
2500 - 450 + 400 - 50
2800 - 150 + 100 - 50
2950 0 - 50 -50
3050 +100 -100 0
3100 + 150 - 100 + 50
3200 + 250 - 100 + 150
3300 + 350 - 100 + 250
3600 + 650 - 100 + 550
ANALYSIS:
In this strategy the investor could hedge the risk of losing a huge amount in case of price
fall. On the other hand, it also shows that the investor’s profit is unlimited in case of
price rise. Had the investor would not have bought put option, there could have been a
tremendous loss, if the price closes at 2950 the loss would have been Rs50 per unit, .The
investor loss is confined to Rs50 per unit, no matter to what extent the price of
underlying falls. The investor would like to exercise his put option right at Rs2950.
Further, when price rises above the put strike price the investor will forego his premium
& he starts making profit on underlying. However, the investor in this strategy starts
making net profit when the price moves above the strategy breakeven price,
It’s a fantastic strategy for those who buy stock for medium & long term. This strategy
limits the risk of losing huge amount of money in case of a fall in the price of underlying,
but the profit remains unlimited, when the price keeps rising. The payoff resembles to
call option buy & is therefore called synthetic long call.
53
STRATEGY 4: LONG PUT
A long Put is a Bearish strategy. To take advantage of a falling market an
investor can buy Put options. Buying a put is the opposite of buying a Call. When you
54
buy a Call you are bullish about the stock / index. When an investor is bearish, he can
buy a Put option. A Put Option gives the buyer of the Put a right to Sell the stock ( to the
Put seller) at a prespecified price and thereby limit his risk..
When to Use: Investor is bearish about the stock / index.
Risk: Limited to the Premium. (Maximum loss if stock / index expires at or above the
option strike price).
Reward: Unlimited
Breakeven: Strike Price - Premium

) )
2 29 May 2650 83.00 106.00 81.15 72.00 72.00 2674

May
29 29 May 2650 0.10 0.10 0.05 0.05 0.00 2462

May
Let’s interpret the above Reliance Ltd data by applying long put strategy.
55
INTERPRETATION:
Let us suppose, The Investor is bearish on Reliance ltd. On 2nd May 2008, He bought 1
lot of Reliance ltd PUT OPSTK having 300 units each lot, with a strike price of Rs2650
at a premium of Rs72, expiring on 29th May2008. On 2nd May 2008, Reliance was
quoting at Rs2674. Underlying value (RELIANCE Ltd) as on 29th May 2008 is Rs246.
TABLE 4.1
STRATEGY: LONG PUT Per unit
On 2nd May2008, Reliance (Underlying) 2674
Investor Buys OPSTK Strike price (K) 2650

Reliance(PA)
Pays Premium (P) 72
Breakeven K+P 2578
Activity Exercises OPSTK Reliance (PA) Receives 2650
Net profit Underlying Close 116

Price – Break Even
In the given example, the investor feels bearish when the Reliance ltd. is trading at Rs 2674. The
given live example clearly shows that the Investor has made profit of Rs116 per unit, at
breakeven price, when the Underlying closes at Rs. 2462. Thus, he is making a profit of Rs
34800 in aggregate.
56
TABLE 4.2
On expiry opstk Reliance closes at Net payoff from Put option (Rs)
2300 278
2400 178
2500 78
2578 0
2600 -22
2700 -72
2800 -72
ANALYSIS:
The long Put is a bearish strategy. To take the advantage of a falling market an investor
buy a put,. A Put gives the buyer of Put to sell the stock to the Put seller at a pre
specified price & there by limit his risk to the amount of premium paid & his profit
potential remain unlimited. As the Reliance Ltd. fall the Put option is in the money
(ITM). If Reliance Ltd. spot price closes below the strike price of Rs. 2650, the buyer
would exercise his option & the profit is to the extent of difference between the strike
price & RIL spot price. However if RIL rises above the strike prices of Rs.2650, he let
his option unexpired. His losses are the extent of premium he paid i.e. Rs.72 he paid for
buying the option.
57
STRATEGY 5: SHORT PUT
Investor is very Bullish on the stock / index. The main idea is to make a short
term income. Selling a Put is opposite of buying a Put. An investor buys Put when he is
bearish on a stock. An investor Sells Put when he is Bullish about the stock – expects the
stock price to rise or stay sideways at the minimum. When you sell a Put, you earn a
Premium (from the buyer of the Put). You have sold someone the right to sell you the
stock at the strike price. If the stock price increases beyond the strike price, the short put
position will make a profit for the seller can retain the Premium (which is his maximum
profit). But, if the stock price decreases below the strike price, by more than the amount
of the premium, the Put seller will lose money. The potential loss being unlimited (until
the stock price fall to zero).
When to Use: Investor is very Bullish on the stock / index. The main idea is to make a
short term income.
Risk: Put Strike Price – Put Premium.
Reward: Limited to the amount of Premium received.
Breakeven: Put Strike Price – Premium.
have an easy understanding of this strategy.
58
1 July 31 July 2010 118.00 150.00 85.00 93.00 93.00 2044
31 31 July 2010 100 129 100 129 0.00 2207

July
Let’s interpret the above Reliance Ltd data.
INTERPRETATION:
Let us suppose, The Investor is bullish on Reliance ltd. On 1st July 2008, He sells 1 lot of
Reliance ltd Put OPSTK having 300 units each lot, with a strike price of Rs2010 at a
premium of Rs93, expiring on 31st July 2008. On 1st July2008, Reliance was quoting at
Rs2044. Underlying value (RELIANCE Ltd) as on 31st July 2008 is Rs2207
TABLE 5.1
STRATEGY: SHORT PUT Per unit

59
On 1st July 2008, Reliance (Underlying) 2044
Investor Sells OPSTK Strike price (K) 2010

Reliance(PA)
Receives Premium (P) 93
Breakeven K–P 1917
Activity Unexercised ; as it is OTM for the

Buyer
Mr. Ali Retain the premium Rs. 93
Net profit 93*300 Limited to the amount 93

of premium paid.
TABLE 5.2
60
On expiry opstk Reliance closes at Net payoff from put option (Rs)
1700 -217
1800 -117
1900 -17
1917 0
2000 83
2100 93
2200 93
ANALYSIS:
The short Put strategy means selling of put when investor feels bullish about Stock and
expects the stock price to rise or stay sideways minimum. When the investor sells a Put,
he earns a premium from the buyer of the put. If the stock prices increases beyond the
strike price, this strategy will make a profit for writer i.e. Investor by the amount of
premium i.e. Rs.93 per unit. But if the stock decreases below the strike price, by more
than the amount of premium, the put seller i.e. The Investor will lose the money.; Profit
in this strategy is potentially limited to the amount of premium received, provided the
price should rise and Loss is Unlimited, if price drops. This, being an American type put
option (PA), the Buyer can exercise his right at any time, until the expiry date.
STRATEGY 6: COVERED CALL
61
This strategy is a often employed when an investor has a short-term neutral to
moderately bullish view on the stock he holds. He takes a short position on the Call
option to generate income from the option premium. When he own shares in a company
which he feel may rise but not much in the near term ( or at best stay sideways). He
would still like to earn an income from the shares. The covered call is a strategy in which
an investor Sells a Call option on a stock he owns (netting him a premium). The Call
Option which is sold in usually an OTM Call. The Call would not get exercised unless
the stock price increases above the strike price. Till then the investor in the stock (Call
seller) can retain the Premium with him. This becomes his income from the stock. This
strategy is usually adopted by a stock owner who is Neutral to moderately Bullish
about the stock.
An investor buys a stock or owns a stock which he feels is good for medium to
long term but is neutral or bearish for the near term. At the same time, the investor does
not mind exiting the stock at a certain price (target price). The investor can sell a Call
Option at the strike price at which he would be fine exiting the stock (OTM strike). By
selling the Call Option the investor earns a Premium. Now the position of the investor is
that of a Call Seller who owns the underlying stock. If the stock price stays at or below
the strike price, the Call Buyer (refer to Strategy 1) will not exercise the Call. The
Premium is retained by the investor.
In case the stock price goes above the strike price, the Call buyer who has the
right to buy the stock at the strike price will exercise the Call option. The Call seller (the
investor) who has to sell the stock to the Call buyer, will sell the stock at the strike price.
Since the stock is purchased simultaneously with writing (selling) the Call, the strategy is
commonly referred to as “buy-write”
62
When to Use: This is an often employed when an investor has a short-term
neutral to moderately bullish view on the stock he holds. He takes a short position on
the Call option to generate income from the option premium.
Risk: If the Stock Price falls to zero, the investor loses the entire value of the Stock but
retains the premium, since the Call will not be exercised against him. So maximum risk =
Stock Price Paid – Call Premium.
Upside capped at the Strike price plus the Premium received. So if the Stock rises
beyond the Strike price the investor (Call seller) gives up all the gains on the stock.
Reward: Limited to (Call Strike Price – Stock Price paid) + Premium received
Breakeven: Stock Price paid – Premium Received
DATE EXPIRY STRIKE OPEN HIGH LOW CLOS SETTLE UNDERLYING

(2008) DATE(2008) PRICE(Rs.) E PRICE VALUE(Rs.)
3 27 march 2280 138 140 138 140 140 2306

March
27 27 March 2280 11.00 14.00 0.50 1.55 0.00 2270

March
63
INTERPRETATION:
The Investor bought Reliance ltd for Rs. 1880 as on 4th May 2009 & simultaneously sells
a call option at a strike price of Rs.1980. Which means Investor does not thinks that price
of reliance ltd will rise above 1980. However in case it rises above 1980, Investor does
not mind getting exercised at that price & exiting the stock at Rs. 1980. Investor receives
a premium of Rs 65 for selling the call. Thus the net out flow to Investor (1880-65 =
1815). She reduces the cost of buying the Stock by this strategy. If the price stays at or
below Rs.1980, the call option will not get exercised & Investor can retain the premium
Rs 65. Premium is extra income. If the stock prices rise above the Rs. 1980, the call
option will get exercised by the call Buyer.
TABLE 6.1
STRATEGY: COVERED CALL Per unit
On 1st Jan 2008, Reliance (Underlying) 1880

Reliance(CA)
Breakeven of Call Strike Price + 2045

Option Premium
Strategy Break Even Stock Buy Price – 1815

Premium Recd
Underlying worth on 31-01-2008(expiry) 2220.55
Activity Buyer will Exercise OPSTK Net Loss = Closing – - 175.55

Reliance (CA) Strike + Premium
Underlying Sells 2220.55
Profit in Underlying + 340.55
Net profit 165
64
TABLE 6.2
On expiry Net payoff Net payoff from 1980 call Net Pay Off from
opstk Reliance from option (Rs) (Sell) Strategy
closes at Underlying
1500 - 380 + 65 - 315
1750 - 130 + 65 - 65
1815 - 65 + 65 0
1900 + 20 + 65 + 85
2000 + 120 + 45 + 165
2500 + 620 - 455 + 165
3000 + 1120 - 955 + 165
.....
ANALYSIS:
In this strategy the investor takes the short position on the call option to generate income
from the option premium. Investor buys a stock or owns a stock which she feels is good
for medium to long term but is neutral or bearish for near term. The investor sells a call
option at a strike price at which she would be fine exiting the stock. (OTM Strike). By
selling a call option the investor earns a premium of Rs.65 per unit. If the stock price
stays below the strike price, the call buyer will not exercise the call. The premium is
retained by the investor. The income increases as the stock rises, but get capped after the
stock reaches the call option strike price. But the loss is unlimited in case price falls.
65
STRATEGY 7: LONG COMBO: SELL A PUT, BUY A CALL
A Long Combo is a Bullish strategy. If an investor is expecting the price of a
stock to move up he can do a Long Combo strategy. It involves selling an OTM (lower
strike) Put and buying an OTM (Higher strike) Call. The strategy simulates the action of
buying a stock (or futures) but at a fraction of the stock price. It is an inexpensive trade,
similar in pay-off to Long Stock, except there is a gap between the strikes As the stock
price rises the strategy starts making profits.
When to Use: Investor is bullish on the stock.
Risk: Unlimited (Lower Strike + net debit).
Reward: Unlimited
Breakeven: Higher strike + net debit

) )
1 31 July 2010 118 150 85.00 93.00 95.00 2040

July
31 31 July 2010 100 129 100 129 0.00 2207

July
66
INTERPRETATION:
A Reliance ltd on 1st July 2008 is trading at Rs.2040. The Investor is bullish on the stock
but does not want to invest Rs.2040. He does a long combo, Wherein he sells a put
option with strike price of Rs.2010 at a premium of Rs.93 & buys a call with strike price
of 2070 Rs. 94 . The net cost of the strategy is Rs 1.
TABLE 7.1
STRATEGY: LONG COMBO: SELL A PUT, BUY A CALL Per unit
On 1stJuly 2008, Reliance (Underlying) 2040

Reliance(PA)
Buy OPSTK Strike price(K) 2070

Reliance(CA)
Pays Premium 94
Net Debit 1
Break even Point (Higher strike price + net Debit) 2071
Activity Exercises OPSTK Reliance (CA) Pays 2071
Net profit Closing – Call Strike Rs. 136

– Net Debit
TABLE 7.2
67
RELIANCE Ltd. Payoff from the Net payoff from the Net payoff (Rs) from
Closes at (Rs) on 2010 put sold(Rs) 2070 call the Strategy
expiry. purchased(Rs)
1500 - 417 - 94 - 511
1600 - 317 - 94 - 411
1900 - 17 - 94 - 114
2000 + 83 - 94 - 11
2071 + 93 - 93 0
2100 + 93 - 64 + 29
2200 + 93 + 36 + 129
2500 + 93 + 336 + 429
ANAYSIS:
As in this strategy an investor is expecting the price of a stock to move up. It involves
selling an OTM (lower strike) Put of Rs. 2010 and buying an OTM (Higher strike) Call
of Rs. 2070. So the strategy simulates the action of buying a stock but at a fraction of the
stock price. As the stock price rises the Investor using this strategy starts making profits
and therefore the profit of an investor is unlimited and Loss is also unlimited as the price
decreases. So here in this strategy we can say that for a small investment of Re. 1 (Net
Debit) Of Investor fetch the returns very high by using this long combo strategy, As the
price of the stock moves up, the investor will make profit or otherwise the potential
losses is also high as the stock price moves down.
STRATEGY 8: PROTECTIVE CALL / SYNTHETIC LONG PUT

68
This is a strategy wherein an investor has gone short on a stock and buys a call to
hedge. This is an opposite of Synthetic Call (Strategy 3). An investor shorts a stock and
buys an ATM or slightly OTM Call. The net effect of this is that the investor creates a
pay-off like a Long Put, but instead of having a net debit ( paying premium) for a Long
Put, he creates a net credit ( receives money on shorting the stock) . In case the stock
price falls the investor gains in the downward fall in price. However, incase there is an
unexpected rise in the price of the stock the loss is limited. The pay-off from the Long
Call will increase thereby compensating for the loss in value of the short stock position.
This strategy hedges the upside in the stock position while retaining downside profit
potential.
When to Use: If the investor is of the view that the markets will go down
(bearish) but wants to protect against any unexpected rise in the price of the stock.
Risk: Limited. Maximum Risk is Call Strike Price – Stock Price + Premium.
Reward: Maximum is Stock Price – Call Premium.
Breakeven: Stock Price – Call Premium

) )
1Jan 31 Jan 3000 75.00 81.00 68.00 70.00 70.00 2850
31 31 Jan 3000 0.10 0.10 0.10 0.10 0.00 2478

Jan
INTERPRATATION:
69
On 1 Jan 2008 reliance is trading at Rs.2850 An investor buys option stock (CA) for
Rs.3000 by paying premium of Rs.70.while shorting the stock at Rs.2850.The net credit
to investor is Rs.2780 (Rs 2850-70).
TABLE 8.1
STRATEGY:SYNTHETIC LONG PUT/PROTECTIVE CALL Per unit (Rs.)
On 1stjan 2008, Reliance (Underlying) 2850
Investor Stock Sold 2850
Buys OPSTK Strike price (K) 3000

Reliance(CA)
Paid Premium (P) 70
Breakeven Stock Price - 2780

Premium Paid
Activity Buys back the Stock Sold Profit +372
CALL option unexercised Loss -70
Net Profit +302
70
TABLE 8.2
RELIANCE Ltd. Payoff from the stock Net payoff from the Net payoff (Rs)
Closes at (Rs) on Sold (Rs) 3000 call option
expiry. Bought (Rs)
0 (Max) +2850 -70 +2780
2000 +850 -70 +780
2500 +350 -70 +280
2700 +150 -70 +80
2780 +70 -70 0
2800 +50 -70 -20
2850 0 -70 -70
2900 -50 -70 -120
3000 -150 -70 -220
3500 -650 +430 -220
4000 -1150 +930 -220
ANALYSIS:
As we have seen in this strategy an investor has gone short on a stock and buys a call to
hedge against the risk of unexpected price rise. An investor shorts a stock and buys an
ATM or slightly OTM Call. So as to create the net effect of this is a pay-off like a Long
Put, but instead of having a net debit ( paying premium) for a Long Put, he creates a net
credit ( receives money on shorting the stock), as we can see from above pay-off
schedule. So in this case as the stock price falls the investor gains (maximum share price
– premium paid) when price moves in the downward i.e. fall in price. However, if there
is an unexpected rise in the price of the stock the loss is limited to the extent of call strike
price (i.e., Rs. 3000)
71
STRATEGY 9: COVERED PUT
This strategy is opposite to a Covered Call. A Covered Call is a neutral to bullish
strategy, whereas a Covered Put is a neutral to Bearish strategy. You do this strategy
72
when you feel the price of a stock / index is going to remain range bound or move down.
Covered Put writing involves a short in a stock / index along with a short put on the
options on the stock / index.
The Put that is sold is generally an OTM Put. The investor shorts a stock because
he is bearish about it, but does not mind buying it back once the price reaches ( fall to) a
target price. This target price is the price at which the investor shorts the Put (Put strike
price). Selling a put means, buying the stock at the strike price if exercised (Strategy
no. 2). If the stock falls below the put strike, the investor will be exercised and will have
to buy the stock makes a profit because he has shorted the stock and purchasing it at the
strike price simply closes the short stock position at a profit. The investor keeps the
Premium on the Put sold. The investor is covered here because he shorted the stock in
the first place.
If the stock price does not change, the investor gets to keep the Premium. He can
use this strategy as an income in a natural market. Let us understand this with an
example.
When to Use: If the investor is of the view that the markets are moderately bearish.
Risk: Unlimited if the price of the stock rises substantially
Reward: Maximum is (Sale Price of the Stock – Strike Price) + Put Premium
Breakeven: Sale Price of Stock + Put Premium
Let’s take a live Reliance Ltd data for OPSTK-PA from 01-08-2008 to 28-08-2008 to

73
) )
1 28 Aug 2250 78.00 150.0 78.00 140.00 140.00 2300

Aug 0
28 28 Aug 2070 100.0 129.0 100.0 129.00 0.00 2070

Aug 0 0 0
INTERPRATATION:
On 1st Aug 2008, Reliance Ltd. Is trading at Rs.2300. An investor shorts the stock of
Rs. 2300 of Reliance Ltd and along with this he also sells a put worth Rs. 2300 of august
for premium of Rs. 80. So the net credit received by Investor is Rs. 2220 (Rs. 2300-80)
TABLE 9.1
STRATEGY: COVERED PUT = Sell Stock + Sell Put Option Per unit (Rs.)
On 1st Aug 2008, Reliance (Underlying) 2300
Stock Sold 2300
Investor Sell OPSTK Strike price (K) 2250

Reliance(PA)
Received Premium (P) 80
Breakeven Stock Price Sold + 2380

Put Premium
Received
Activity Buys back the Stock Sold Profit +230
2250 Reliance Put OPTSTK Loss -100

Exercised
Net Profit +130
TABLE 9.2
74
RELIANCE Ltd. Payoff from the Net payoff from Net payoff (Rs)
Closes at (Rs) on stock Sold (Rs) Reliance 2250 put
expiry. option Sold (Rs)
0 (Max) +2300 -2170 +130
1500 +800 -670 +130
2100 +200 -70 -130
2200 +100 +30 +130
2300 0 +80 +80
2380 -80 +80 0
2400 -100 +80 -20
2500 -200 +80 -120
2700 -400 +80 -320
3000 -700 +80 -620
ANALYSIS:
The Covered Put is a neutral to Bearish strategy. As an investor do this strategy when
he feel the price of a Reliance Ltd. is going to remain range bound or move down. So
this strategy Covered Put writing involves a short in a Reliance Ltd Stock of Rs. 2300
along with also sells Put options of the Reliance Ltd of Rs. 2250 which is an OTM (PA).
The investor shorts a stock because he is bearish about it, He does shorting of stock as to
buy it back once the price reaches (fall to) a target price. This target price is the price at
which the investor shorts the Put (Put strike price i.e., Rs 2250). If the stock falls below
the put strike, the investor will be exercised and will have to buy the stock which makes
a profit because he has shorted the stock and purchasing it at the strike price simply
closes to the short stock position at a profit. If the stock price does not change, the
investor gets to keep the Premium of Rs. 80
75
STRATEGY 10: LONG STRADDLE
In This strategy investor thinks that the underlying stock / index will experience
significant volatility in the near term .A Straddle is a Volatility Strategy and is used
76
when the stock price / index is expected to show large movements. This strategy
involves buying a call as well as put on the same stock / index for the same maturity and
strike price, to take advantage of a movement in either direction, a soaring or
plummeting value of the stock / index. If the price of the stock / index increases, the call
is exercised while the put expires worthless and if the price of the stock / index
decreases, the put is exercised, the call expires worthless. Either way if the stock/ index
show volatility to cover the cost of the trade, profits are to be made. With Straddles, the
investor is direction neutral. All that this is looking out for is the stock / index to break
out exponentially in either direction.
When to Use: The investor thinks that the underlying stock / index will experience
significant volatility in the near term.
Risk: Limited to the initial premium paid.
Reward: Unlimited
Breakeven:
1. Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid
2. Lower Breakeven Point = Strike Price of Long Put – Net Premium Paid
77
Let’s take a live Reliance Ltd data for OPSTK-CA from 01-01-2008 to 31-01-
2008 to have an easy understanding of this strategy

3 Jan 31Jan 3000 75.00 81.00 68.00 70.00 70.00 2950
31 31 Jan 3000 0.10 0.10 0.10 0.10 0.00 2478

Jan
Live Reliance Ltd data for OPSTK-PA from 01-01-2008 to 31-01-2008 to have
an easy understanding of this strategy

) )
3 31Jan 3000 111.0 111.0 84.00 100 100 2950

Jan 0 0
31 31 Jan 3000 0.00 0.00 530.0 530.0 0.00 2478

Jan 0
Let’s interpret the above Reliance Ltd data of both CA & PA because both data of same
month is needed in this strategy.
INTERPRETATION:
On 3 rd Jan 2008, Reliance Ltd. is trading at Rs.2950. The investor thinks that underlying
RIL Ltd. OPSTK will experience significant volatility in near term & is expected to
show large movement. So the Investor enters into long straddle by buying Jan’s month
Put with a Strike Price of Rs. 3000 for premium of Rs. 100 and a Jan’s call of Rs. 3000
for premium of Rs. 76. The net debit taken to enter the trade is Rs.176.
78
TABLE 10.1
sSTRATEGY: LONG STRADDLE(BUY PUT + BUY CALL) Per unit
On 3rd Jan 2008, Reliance (Underlying) 2950
Investor Buys OPSTK Reliance (CA) & .Strike price (K) 3000
(PA)
Upper Breakeven Point Strike price of long call + Net 3176

Premium Paid
Lower Breakeven Point Strike Price of long put + Net 2824

Premium Paid
Activity Exercises OPSTK Reliance 3000

(PA)
Net Profit 2824 – 2478 346
TABLE 10.2
RELIANCE Ltd. Closes Net Payoff from 3000 Net payoff from the Net payoff (Rs)
at (Rs) on expiry. PA Buy 3000 CA Buy
0 (Max) +2924 -100 +2824
2000 +924 -100 +824
2500 +424 -100 +324
2824 +100 -100 0
3176 -76 +76 0
3500 -76 +400 +324
3800 -76 +724 +648
4200 -76 +1100 +1024

79
ANALYSIS:
This strategy involves buying a call as well as put on the same Reliance Ltd. for the same
maturity 31 Jan, 2008 and strike price Of Rs.3000, So as to take advantage of a
movement in either direction. If the price of the Reliance Ltd increases, the investor
exercised the Call option while the put option expires worthless and if the price of the
Reliance Ltd decreases, the put option is exercised, the call expires worthless. Either way
if the Reliance Ltd. shows volatility to cover the cost of the trade, profits are to be made.
So the loss is limited to the premium paid of Rs. 176 and the profit is unlimited as the
price of Reliance Ltd rises.
80
STRATEGY11: SHORT STRADDLE
The investor in this strategy thinks that the underlying stock / index will
experience very little volatility in the near term. A Short Straddle is the opposite of long
Straddle. It is a strategy to be adopted when the investor feels the market will not show
much movement. He sells a Call and a Put on the same stock / index for the same
maturity and strike price. It creates a net income for the investor. If the stock / index do
not move much in either direction, the investor retains the Premium as neither the Call
nor the Put will be exercised. However, incase the stock / index moves in either
direction, up or down significantly, the investor’s losses can be significant. So this is a
risky strategy and should be carefully adopted and only when the expected volatility in
the market is limited. If the stock / index value stays close to the strike price on expiry of
the contracts, maximum gain, which is the Premium received is made.
When to Use: The investor thinks that the underlying stock / index will experience very
little volatility in the near term.
Risk: Unlimited.
Reward: Limited to the premium received
Breakeven:
1. Upper Breakeven Point = Strike Price of Short Call + Net Premium Received
2. Lower Breakeven Point = Strike Price of Short Put – Net Premium Received.
81
Let’s take a live Reliance Ltd data for OPSTK-PA from 01-09-2008 to 25-09-

) )
1 25 Sept 2310 79.00 85.00 64.00 65.00 65.00 2141

Sept
25 25 Sept 2310 0.00 0.00 0.00 100 0.00 2025

Sept
Live Reliance Ltd data for OPSTK-CA from 01-09-2008 to 25-09-2008 to have an easy
understanding of this strategy

) )
1 25 Sept 2310 92.00 110.0 82.0 95.00 95.00 2141

Sept 0 0
25 25 Sept 2310 0.50 0.50 0.05 0.05 0.00 2025

Sept
Let’s interpret the above Reliance Ltd data of both CA & PA because both data of same month is
needed in this strategy.
INTERPRETATION:
On 1st September 2008, Reliance Ltd. is trading at Rs. 2141. The investor thinks that
underlying stock/index will experience significant volatility in near term & is expected to
show large movement. So the Investor enters into long straddle by buying Jan’s month
Put of Rs. 2310 for premium for Rs. 95 Jan’s call of Rs. 3000 for premium of Rs. 65.
The net debit taken to enter the trade is Rs.160.
82
TABLE 11.1
STRATEGY-SHORT STRADDLE Per unit
On1 September 2008, Reliance (Underlying) 2141
Investor Sells OPSTK Reliance(PA) & Strike price (K) 2130

(CA)
Receives Total Premium (P) 160
Upper Breakeven Strike Price of short 2290

Call + Net Premium
Lower Breakeven Strike Price of Short 1970

put – Net Premium
Activity Reliance (CA) OPSTK Retains Premium 95

Unexercised
Reliance (PA) OPTSTK Exercised Pay Off : Net Loss -40
Net Profit 55
83
TABLE 11.2
RELIANCE Ltd. Closes at Net Payoff from the 2130 Net payoff from 2130 Net payoff
(Rs) on expiry. Reliance put sold(Rs) Reliance Call Sold (Rs). (Rs)
0 (Max) -2065 +95 -1970
1500 -565 +95 -470
1900 -165 +95 -70
1970 (L BEP) -95 +95 0
2025 -40 +95 +55
2100 +35 +95 +130
2200 +65 +25 +90
2290 (U BEP) +65 -65 0
2500 +65 -275 -210
3000 +65 -775 -710
4000 +65 -1775 -1710
ANALYSIS::
It is a strategy which is adopted when the investor feels the market will not show much
movement. The investor has used this strategy by buying Jan’s month Put of Rs. 3000 for
premium for Rs. 100 Jan’s call of Rs. 3000 for premium of Rs. 76. It creates a net
income for the investor. If the Reliance Ltd does not move much in either direction, the
Investor retains the Premium of Rs. 160 and neither the Call option nor the Put option
will be exercised.
84
So the Loss is unlimited & profit is limited to the premium paid of Rs. 160.
Therefore this is a risky strategy and should be carefully adopted only when the expected
volatility in the market is limited
85
STRATEGY12: LONG STRANGLE
In this strategy an investor thinks that the underlying stock / index will
experience very high levels of volatility in the near term. 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-
money (OTM) call of the same underlying stock / index and expiration date. Here again
the investor is directional neutral but is looking for an increased volatility in the stock /
index and the prices moving significantly in either direction. Since OTM options are
purchased for both Calls and Puts it makes the cost of executing a Strangle cheaper as
compared to a Straddle, where generally ATM strikes are purchased. Since the initial
cost of a Strangle is cheaper than a Straddle, the returns could potentially be higher.
However, for a Strangle to make money, it would require greater movement on the
upside or downside for stoke / index than it would for a Straddle. As with a Straddle, the
strategy has a limited downside (i.e. the Call and the put premium) and unlimited upside
potential.
When to Use: The investor thinks that the underlying stock / index will experience very
high levels of volatility in the near term.
Risk: Limited to the initial premium paid.
Reward: Unlimited
Breakeven:
1. Upper Breakeven Point = Strike Price of Long Call + Net Premium paid
2. Lower Breakeven Point = Strike Price of Long Put – Net Premium paid
86

) )
1 Oct 29 Oct 1710 92.00 110.00 80.00 80.00 80 1675
29 29 Oct 1710 0.50 0.50 0.05 0.05 0.00 1201

Oct

) )
1 Oct 29 Oct 1650 99.00 120.00 75.00 75.00 75.00 1675
29 29 Oct 1650 0.10 0.10 0.10 0.10 0.00 1201

Oct
INTERPRETATION:
On 1st Oct 2008 Reliance Ltd Is trading at Rs.1675. Investor thinks that the Reliance Ltd
will experience very high level of volatility in the near terms And she Executes this
strategy by buying a call of Rs 1710 by paying premium of Rs.80 And Rs. 2010 Reliance
Ltd. Put by paying premium Of Rs.75.Net debit taken to enter trade is Rs. 188.
87
TABLE 12.1
STRATEGY- LONG STRANGLE ( BUYING OTM PUT + BUYING OTM CALL) Per unit
On 1st Oct 2008, Reliance (Underlying) 1675
Investor Buys OPSTK Reliance (CA) Strike price (K) 1710
Pays Premium (P) 80
Buys OPSTK Reliance (PA) Strike price (K) 1650
Pays Premium (P) 75
Upper Breakeven Strike Price of Long 1865

Call+ Net
Premium
Lower Breakeven Strike Price of Long 1495

put + Net
Premium
Underlying worth on 31-07-2008 (expiry) 1201.75
Activity Reliance (CA) OPTSTK Premium Paid -80

Unexercised
Reliance (PA) OPTSTK Pay Off 373.25

Exercised
NET PROFIT 293.25
88
TABLE 12.2
RELIANCE Ltd. Closes at Payoff from Reliance Payoff from Reliance Net payoff
(Rs) on expiry. 1650 PUT Buy 1710 Call Buy (Rs)
0 (Max) +1575 -80 +1495
1200 +375 -80 +295
1495 +80 -80 0
1600 -30 -80 -110
1800 -75 +10 -65
1865 -75 +75 0
2000 -75 +210 +135
2500 -75 +710 +635
3000 -75 +1210 +1135
.....
ANALYSIS:
As this strategy involves the simultaneous buying of a slightly (OTM) put option and a
slightly (OTM) call option of the same Reliance Ltd. and same expiration date 31 July,
2008. The 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. So Loss for the investor is limited to premium paid of Rs 155 and profit is
unlimited.
So the initial cost of this strategy is limited and returns are potentially higher as the stock
price moves upward
89
STRATEGY13: SHORT STRANGLE
This options trading strategy is taken when the options investor thinks that the
underlying stock will experience Little Volatility in the near term. A short strangle is a
slight modification to the Short Straddle. It tries to improve the profitability of the trade
for the Seller of the options by widening the breakeven points so that there is a much
greater movement required in the underlying stock / index, for the Call and Put option to
be worth exercising. This strategy involves the simultaneous selling of a slightly out- of
– the- money (OTM) put and a slightly out- of- the- money (OTM) call of the same
underlying stock and expiration date. This typically means that since OTM call and put
are sold, the net credit received by the seller is less as compared to a Short Straddle, but
the break even points are also widened. The underlying stock has to move significantly
for the Call and the put to be worth exercising. If the underlying stock does not show
much of a movement, the seller of the Strangle gets to keep the Premium.
When to use: This options trading strategy is taken when the options investor thinks that
the underlying stock will experience Little Volatility in the near term.
Risk: Unlimited.
Reward: Limited to the premium received
Breakeven:
1. Upper Breakeven Point = Strike Price of Short Call + Net Premium Received
2. Lower Breakeven Point = Strike Price of Short Put – Net Premium Received.
90

(2009) DATE(2009) PRICE(Rs) PRICE VALUE(Rs.)
3 Aug 27 Aug 2070 82.00 100 68.00 75.00 75.00 2017
27 27 Aug 2070 0.50 0.50 0.05 100 0.00 2045

Aug
Live Reliance Ltd data for OPSTK-PA from 01-08-2009 to 27-08-2009 to have an easy

(2009) DATE(2009) PRICE(Rs) PRICE VALUE(Rs.)
3 Aug 27 Aug 1950 72.00 78.00 55.00 60.00 60.00 2017
27 Aug 27 Aug 1950 0.10 1.10 0.10 100 0.00 2045
INTERPRETATION:
The Investor thinks that the underlying stock will experience little volatility in near
terms. The RIL is trading at Rs.2017 on 3rd Aug 2009.An investor , executes a short
strangle by selling a Rs 1950 RIL Put For a Premium of Rs.60 & Rs. 2070 RIL Call for a
Premium of Rs. 70. The Net credit is Rs. 212, which is also her maximum possible Gain.
91
TABLE 13.1
STRATEGY- SHORT STRANGLE (SELL OTM PUT + SELL OTM CALL) Per unit (Rs)
On 3 AUG, 2009, Reliance (Underlying) 2017
Investor Sells OPSTK Reliance (CA) Strike price (K) 2070
Sells OPSTK Reliance (PA) Strike price (K) 1950
Upper Breakeven Strike Price of short Call+ Net 2205

Premium Received
Lower Breakeven Strike Price of Short put + Net 1815

Premium Received
Underlying worth on 27-08-2009 (expiry) 2045
Activity Reliance Call OPTSTK 75

Unexercised
Reliance Put OPTSTK 60

Unexercised
NET PROFIT 135
92
TABLE 13.2
RELIANCE Ltd. Closes at Payoff from the 1950 Net payoff from the 2070 Net payoff
(Rs) on expiry. Put sold(Rs.) Call(Rs) Sold (Rs)
1200 -690 +75 -615
1500 -390 +75 -390
1700 -190 +75 -115
1815 -75 +75 0
1900 +10 +75 +85
2100 +60 +45 +105
2205 +60 -60 0
2300 +60 -155 -95
3000 +60 -855 -795
ANALYSIS:
This strategy involves the simultaneous selling of a slightly out- of – the- money (OTM)
put and a slightly out- of- the- money (OTM) call of the same underlying stock i.e.,
Reliance Ltd. And same expiration date i.e., 31 Jan, 2008. As the OTM call and put are
sold, the net credit received by the seller is less as compared to a Short Straddle, but here
the break even points are also widened for the investor. If the Reliance Ltd moves
significantly, the Call and the put are to worth exercising. If the Reliance Ltd does not
show much of a movement, the seller of the Stock gets to keep the Premium of Rs.135.
So the profit is Limited & loss unlimited
93
STRATEGY 14: COLLAR
The collar is a good strategy to use if the investor is writing covered calls to earn
premiums but wishes to protect him self from an unexpected sharp drop in the price of
the underlying security. A Collar is similar to Covered Call (Strategy 6) but involves
another leg – buying a Put to insure against the fall in the price of the stock. It is a
Covered Call with a limited risk. So a Collar is buying a stock, insuring against the
downside by buying a Put and then financing (party) the put by selling a Call.
The put generally is ATM and the call is OTM having the same expiration month and
must be equal in number of shares. This is a low risk strategy since the put prevents
downside risk. However, do not expect unlimited rewards since the Call prevents that. It
is a strategy to be adopted when the investor is conservatively bullish. The following
example should make Collar easier to understand.
When to Use: The collar is a good strategy to use if the investor is writing covered calls
to earn premiums but wishes to protect him self from an unexpected sharp drop in the
price of the underlying security.
Risk: limited.
Reward: Limited.
Breakeven: Purchase Price of Underlying – Call Premium + Put Premium.
94

01 29 April 1560 71.00 75.00 60.00 72.00 72.00 1581

April
29 29 April 1560 0.10 0.10 0.00 75.00 0.00 1806

April

01 29 April 1650 30.00 53.70 27.10 50.00 50.00 1581

April
29 29 April 1650 00.00 00.00 0.00 90.85 0.00 1806

April
95
Let’s interpret the above Reliance Ltd data of both CA & PA because both data of same month is
needed in this strategy.
INTERPRETATION:
An investor is holding some stock on RIL Ltd.Which is currently trading at Rs. 1581 on
1st April 2009. He decide to establish a collar by writing a Call of strike price of Rs.1650
For a premium of Rs.50 & simultaneously purchasing put option with strike price of
Rs.1560 for a premium of Rs.72 to insure against downward fall in price of underlying
security 7 then financing the partly put by selling a call. Since he pays Rs.2950 for the
stock of Reliance Ltd. Another of Rs.100 for put but receives Rs.112 per unit for selling
the call option.
TABLE 14.1
STRATEGY- COLLAR Per unit

(Rs)
On 1 Apr 09, Reliance (Underlying) 1581
Investor Sells OPSTK Reliance (CA) Strike price 1650

(K)
Buys OPSTK Reliance (PA) Strike price 1560

(K)
Pays Premium (P) 72
Breakeven Purchase price of underlying – Call Premium + Put 1603

point premium
Underlying worth on 29 Apr 2009 (expiry) 1806
Activity Profit in Underlying +225
Loss in Reliance CA -106
Reliance PA Premium Paid -72
Net Profit +47

96
TABLE 14.2
RELIANCE Ltd. Payoff from the Net payoff Net payoff Net Payoff(Rs.)
Closes at (Rs) on Call sold(Rs.) from the Put from the stock
expiry. Purchased (Rs) of RIL Ltd (Rs)
0 (Max) +50 +1488 -1581 -43
1200 +50 +288 -381 -43
1500 +50 -12 -81 -43
1603 +50 -72 +22 0
1700 0 -72 +119 +47
1800 -100 -72 +219 +47
3000 -1300 -72 +1419 +47
ANALYSIS:
In this strategy the put generally is ATM and the call is OTM having the same
expiration month i.e., 29 April 2009 and must be equal in number of shares i.e., 300
97
units. The investor in this strategy is involve in buying a stock, insuring against the
downside by buying a Put of strike price Rs. 1560 at premium of Rs. 72 and then
financing the put by selling a Call of strike price of Rs 1650 at premium of Rs. 50. So
this is a low risk strategy since the put prevents downside risk. However, do not expect
unlimited rewards since the Call prevents that. The investor in this strategy does not
expect unlimited rewards since the Call prevents that. Therefore both risk & profit is
limited in this strategy.
98
STRATEGY 15: BULL CALL SPAREAD STRATEGY: BUY CALL OPTION, SELL
CALL OPTION
Investor is moderately bullish in this strategy .A bull spread is constructed by
buying an in-the money (ITM) call option, and selling another out-of-money (OTM) call
option. Often the call with the lower strike price will be in-the-money while the Call with
the higher strike price is out-of-the-money. Both calls 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 to the higher (sold) strike, the investor makes the
maximum profit. Let us try and understand this with an example.
When to Use: Investor is moderately bullish.
Risk: Limited to any initial premium paid in establishing the position. Maximum loss
occurs where the underlying falls to the level of the lower strike or below.
Reward: Limited to the difference between the two strikes minus net premium cost.
Maximum profit occurs where the underlying rises to the level of the higher strike or
above.
Break-even-Point (BEP): Strike Price of Purchased call + Net Debit
99

) )
1 24 April 2310 89.00 125.0 68.00 115.00 115.00 2350

April 0
1 24 April 2400 48.00 77.40 36.60 70.00 70.00 2350

April
1 24 April 2310 260.0 260.0 260.0 260.00 0.00 2582

April 0 0 0
INTERPRETATION:
An Investor buys a stock in RIL Ltd, which is currently trading at Rs. 2350 as on 1
April 2008.She is moderately bullish & buys a RIL OPSTK (CA) (ITM) with strike price
of Rs. 2310 by paying a premium of Rs.115 & she sells a RIL OPSTK (CA) (OTM) of
Rs. 2400 by paying a premium of Rs. 70. The Net debit here is Rs. 45, which is her
maximum loss.
100
TABLE 15.1
STRATEGY- BULL CALL SPREAD STRATEGY (BUY CALL Per unit

OPTION & BUY CALL OPTION) (Rs)
On 1 April 2008, Reliance (Underlying) 2350
Investor Buys OPSTK(ITM) Reliance (CA) Strike price 2310

(K)
Sells OPSTK(OTM) Reliance (CA) Strike price 2400

(K)
Net Premium Paid 45
Strike price of the Call Purchased + 2355

Breakeven point
Net debit Paid
Underlying worth on 24-04-2008 (expiry), Reliance Closes at 2582
Activity Exercises OPSTK Reliance 2310 CA Profit +157
Exercised OPTSTK Reliance 2400 CA Loss -112
Net Profit +45
101
TABLE 15.2
RELIANCE Ltd. Closes Payoff from the 2310 Net payoff from the Net payoff
at (Rs) on expiry. Call Buy(Rs.) 2400 Call Sold (Rs). (Rs)
0 (Max) -115 +70 -45
2200 -115 +70 -45
2300 -115 +70 -45
2355 -70 +70 0
2400 -25 +70 +45
2800 +375 -330 +45
3500 +1075 -1030 +45
102
ANALYSIS:
The Bull call spread strategy involves buying ITM call option & selling another
OTM Call Both the call are of same underlying security i.e., Reliance Ltd & expiration
month i.e., 24 April, 2008.
By using this strategy the Investor has brought the BEP down and by this she will
reduce the cost of the trade. Therefore it will reduce the loss on the trade to the initial
premium paid i.e., Rs 115 in establishing the position & maximum loss occur where the
underlying fall to the level of lower strike or below. However the strategy has limited
gain & is therefore ideal when markets are moderately bullish,
STRATEGY 16: BULL PUT SPREAD STRATEGY: SELL PUT OPTION, BUY
PUT OPTION
103
When the investor is moderately bullish he uses this strategy. A bull put spread
can be profitable when the stock / index are either range bound or rising. The concept is
to protect the downside of a Put sold by buying a lower strike Put, which acts as
insurance for the Put sold. The lower strike
Breakeven is the higher strike less the net credit received. Provided the stock remains
above that level, the investor makes a profit. Otherwise he could make a loss. The
maximum loss is the difference in strike less the net credit received. This strategy should
be adopted when the stock / index trend is upward or range bound. Let us understand this
with an example.
When to Use: When the investor is moderately bullish.
Risk: limited. Maximum loss occurs where the underlying falls to the level of the lower
strike or below.
Reward: Limited to the net premium credit. Maximum profit occurs where underlying
rises to the level of the higher strike or above.
Breakeven: Strike Price of Short Put – Net Premium Received.
104

1 July 31 July 2070 97.00 129.00 75.00 120.00 120.00 2050
1 July 31 July 1950 0.00 0.00 0.00 70.00 70.00 2050
31 31 July 2070 1.60 1.60 0.10 0.10 0.00 2207

July
INTERPRETATION:
An investor who is moderately bullish on the stock of Reliance Ltd. This is currently
trading at Rs.2050 as on 1 July 2008. Mr. Robin sells a Reliance Ltd (PA) with strike
price of Rs.2070 at a premium of Rs. 120 & Further Buys an OTM Reliance Ltd. (PA)
with a strike price of Rs.1950. at a premium of Rs. 70. Both option expiring on 31 July
2008.
105
TABLE 16.1
STRATEGY- BULL PUT SPREAD STRATEGY (SELLPUT OPTION & Per unit
SELL PUT OPTION) (Rs)
On 1 July2008, Reliance (Underlying) 2050
Investor Sell OPSTK(OTM) Reliance (PA) Strike price 2070

(K)
Buys OPSTK (OTM) Reliance (PA) Strike price 1950

(K)
Pays Premium (P) 70
Net Premium Received 50
Strike price of Put sold - Net Premium

Breakeven point
Received
Underlying worth on31-07-2008 (expiry) 2207
Activity Reliance 2070 OPSTK PA Unexercised : Profit +120

Premium Retained
Reliance 1950 OPTSTK PA Unexercised : Loss -70

Premium Paid
Net Profit +50
106
TABLE 16.2
RELIANCE Ltd. Closes at Payoff from the 2070 Payoff from the 1950 Net payoff
(Rs) on expiry. Reliance Put sold(Rs.) Reliance Put Buy (Rs). (Rs)
0 (Max) -1950 +1880 -70
1800 -150 +80 -70
1900 -50 -20 -70
2000 +50 -70 -20
2020 +70 -70 0
2050 +100 -70 +30
2100 +120 -70 +50
2200 +120 -70 +50
2207 +120 -70 +50
2500 +120 -70 +50
.....
ANALYSIS:
This strategy is moderately bullish .As we have seen from above example that Bull Put
Strategy is profitable when Reliance Ltd is either range bound or rising. The concept in
this strategy is to protect the downside of a Put sold by buying a lower strike Put of Rs.
1950at a premium of Rs.70, which acts as insurance for the Put sold. If the Reliance Ltd
rises, both Puts expire worthless and investor can retain the Premium. If the Reliance
Ltd. falls, then the investor‘s breakeven is the higher strike less the net credit received
i.e. 2010 – 32 =1978. If the stock remains above that level, the investor makes a profit.
107
Otherwise he could make a loss. The maximum loss is the difference in strike less the net
credit received.
STRATEGY 17: BEAR CALL SPREAD STRATEGY : SELL ITM CALL, BUY
OTM CALL
The Bear 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 the strategy the
investor receives a net credit because the Call he buys is a higher strike price than the
Call sold. The strategy requires the investor to buy out-of-the-money (OTM) call options
while simultaneously selling in-the-money (ITM) call options on the same underlying
stock index. This strategy can also be done with both OTM calls with the Call purchased
being higher OTM strike than the Call sold. If the stock / index 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 a loss. The maximum loss is
the difference in strikes less the net credit received. Let us understand this with an
example.
When to Use: When the investor is mildly bearish on market.
Risk: limited to the difference between the two strikes minus the net premium.
Reward: Limited to the net premium received for the position i.e., premium received for
the short call minus the premium paid for the long call.
Break even Point: Lower Strike+ Net credit
108

1 Jan 31 Jan 1200 95.00 109.95 90.00 103.00 103.00 1254
1 Jan 31 Jan 1320 39.00 42.40 34.00 41.00 41.00 1254
31 Jan 31 Jan 1530 12.00 12.00 5.00 5.05 5.05 1200
INTERPRETATION:
An Investor is mildly bearish on RIL Ltd. So He sells ITM Call Option with a strike
price of Rs. 1200 at a premium of Rs. 103 and buys An OTM Call Option with strike
price of Rs 1320 at a premium of Rs. 41.When RIL is currently trading at Rs.1254 as on
1 Jan, 2009.
109
TABLE 17.1
STRATEGY- BEAR CALL SPREAD STRATEGY (SELL ITM CALL Per unit (Rs)
OPTION & BUY OTM CALL OPTION)
On 1 Jan 2009, Reliance (Underlying) 1254
Investor Sells (OTM) Reliance Strike price 1200

OPSTK(CA) (K)
Buys (OTM) Reliance OPSTK Strike price 1320

(CA) (K)
Pays Premium (P) 41
Breakeven point Lower Strike + Net Credit Recd 1200 + 62 1262
Activity Unexercised 1200 OPSTK Retains 103

Reliance Premium
Unexercised 1320 OPSTK Premium 41

Reliance Pays
Net Profit 62
110
TABLE 17.2
RELIANCE Ltd. Closes Payoff from the 1200 Net payoff from the 1320 Net payoff
at (Rs) on expiry. Reliance Call Sold(Rs.) Reliance call Bought(Rs). (Rs)
1000 +103 -41 +62
1200 +103 -41 +62
1262 +41 -41 0
1300 +3 -41 -38
1350 -47 -11 -58
1500 -197 +139 -58
2000 -697 +639 -58
3000 -1697 +1639 -58
ANALYSIS:
The Bear Spread strategy is adopted when the investor feels that the stock / index is
either range bound or falling. The strategy requires the investor to buy out-of-the-money
(OTM) call options while simultaneously selling in-the-money (ITM) call options on the
same underlying stock index. 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 the strategy the investor
receives a net credit because the Call he buys is a higher strike price 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 a loss. The maximum loss is the difference in strikes less the net credit
received.
111
STRATEGY 18: BEAR PUT SPREAD STRATEGY: BUY PUT, SELL PUT
This strategy requires the investor to buy an in-the-money (higher) put option and
sell an out-of-the-money (lower) put option on the same stock with the same expiration
date. This strategy creates a net debit for the investor. The net effect of the strategy is to
bring down the cost and raise 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 bought Puts will have the effect of capping the investor’s downside. While the
Puts sold will reduce the investors costs, risk and raise breakeven point (from Put
exercise point of view). If the stock price closes below the out-of-the-money (lower) put
option strike price on the expiration date, then the investor reaches maximum profits. If
the stock price increases above the in-the-money (higher) put option strike price at the
expiration date, then the investor has a maximum loss potential of the net debit.
When to Use: When you are moderately bearish on market direction.
Risk: limited to the net amount paid for the spread. i.e., the premium paid for long
position less premium received for short position.
Reward: Limited to the difference between the two strike prices minus the net premium
paid for the position.
Breakeven: Strike Price of long Put – Net Premium Paid.
112

) )
1 Jan 31 Jan 1320 107.00 108.95 93.00 105 105 1254
1 Jan 31 Jan 1170 34.00 38.00 32.00 35.00 35.00 1254
31 31 Jan 990 19.70 19.70 16.70 16.70 16.70 1200

Jan
INTERPRETATION:
RIL Ltd is presently trading at Rs.1254 on 1 Jan 2009. An investor expects RIL Ltd to
fall. She buys one RIL OPSTK (ITM) Put with a strike price of RS.1320 at a premium of
Rs.105 & sells one RIL OPSTK (OTM) put with strike Price of Rs. 1170 with a premium
of RS.35.
113
TABLE 18.1
STRATEGY- BEAR PUT SPREAD STRATEGY (BUY PUT WITH Per unit
HIGHER STRIKE & SELL A PUT WITH LOWER STRIKE) (Rs)
On 1 July 2008, Reliance (Underlying) 1254
Investor Buys (ITM) Reliance Strike price (K) 1320

OPSTK(PA)
Sells (ITM) Reliance OPSTK Strike price (K) 1170

(PA)
Strike price of long put (Strike price of long put-net 1250

Breakeven point
premium)
Activity Unexercised 1170 Reliance Put Retains Premium +35

OPSTK
Exercises 1320 Reliance Put Payoff +15

OPTSTK
Net Profit +50
114
TABLE 18.2
RELIANCE Ltd. Closes at Payoff from the1320 Reliance Net payoff from Net payoff
(Rs) on expiry. Put Bought(Rs.) the1170 Put sold (Rs). (Rs)
0 (Max) +1215 -1135 +80
900 +315 -235 +80
1000 +215 -135 +80
1100 +115 -35 +80
1200 +15 +35 +50
1250 -35 +35 0

115
1300 -85 +35 -50
1400 -105 +35 -70
1500 -105 +35 -70
.....
ANALYSIS:
This strategy requires the investor to buy an ITM (higher) put option and sell an OTM
(lower) put option on the same stock with the same expiration date. As the investor is
having the bearish outlook, so the Investor will make money as the RIL OPSTK falls.
The bought Puts will have the effect of capping the investor’s downside. While the Puts
sold will reduce the investors costs, risk and raise breakeven point (from Put exercise
point of view). If the stock price closes below the OTM (lower) put option strike price on
the expiration date, then the investor reaches maximum profits. If the stock price
increases above the ITM (higher) put option strike price at the expiration date. Therefore
the investor has a maximum loss potential of the net debit (i.e. the premium Paid less
premium received for short position) & profit is limited to the difference between the
two strike prices minus the net premium paid for the position.
116
STRATEGY 19: LONG CALL BUTTERFLY: SELL 2 ATM CALL OPTIONS, BUY 1
ITM CALL OPTION AND BUY 1 OTM CALL OPTION
A long Call Butterfly is to be adopted when the investor is expected very little
movement in the stock price / index. The investor is looking to gain from low volatility
at a low cost. The strategy offers a good risk / reward ratio, together with low cost. A
long butterfly is similar to a Short Straddle except your losses are limited. The strategy
can be done by selling 2 ATM Calls, buying 1 ITM Call, and buying 1 OTM Call options
(there should be equidistance between the strike prices). The result is positive incase the
stock / index remains range bound. The Maximum reward in the strategy is however
restricted and takes place when the stock / index is at the middle strike at expiration. The
maximum losses are also limited. Let us see an example to understand the strategy.
117
When to Use: When the investor is neutral on market direction and bearish on
volatility.
Risk: Net debit paid.
Reward: Difference between adjacent strikes minus net debit.
Breakeven:
Upper Breakeven Point = Strike Price of Higher Strike Long Call – Net Premium Paid
Lower Breakeven Point = Strike Price of Lower Strike Long Call + Net Premium Paid

) )
2 Feb 27 Feb 1290 110.0 116.0 63.25 66.00 66.00 1280

0 0
2 Feb 27 Feb 1230 131.0 135.0 105.0 105.00 105.00 1280

0 0 0
2 Feb 27 Feb 1350 70.00 79.90 40.10 41.00 41.00 1266.05
INTERPRETATION:
RIL Ltd is currently trading at Rs. 1280. An investor expects very little movement in
RIL Ltd. She sells 2 ATM RIL Ltd. Call options with a strike price of Rs. 1290 at a
118
premium of Rs. 66 each unit, Buys 1 ITM Call option with a strike price of Rs. 1230 at a
premium of Rs. 105.00 and buys OTM call option with a strike price of Rs.1350 at a
premium of Rs. 41. The net debit is Rs.14. The
119
TABLE 19.1
STRATEGY- LONG CALL BUTTERFLY : SELL 2 ATM CALL OPTIONS, Per unit
BUY 1 ITM CALL OPTION AND BUY 1 OTM CALL OPTION (Rs)
On 2 Feb 2009, Reliance (Underlying) 1280
Investor Sell 2 (ATM) Reliance Strike price (K) 1290

OPSTK(CA)
Receives = 66*2 Premium (P) 132
Buy (ITM) Reliance Strike price (K) 1230

OPSTK (CA)
Buys 1(OTM) Reliance Strike price(K) 1350

OPSTK(CA)
Pays Premium 41
Net Premium Paid. 132-146 14
Upper break even point = strike price of higher strike long 1336
Breakeven point
call – Net Premium paid
Lower break even point. = strike price of lower strike long 1244
call + net premium paid
Underlying worth on 27-02-2009 (expiry) 1266.05
Activity Reliance 1290 call Retains Premium +132

unexercised
Exercises 1230 Reliance Net Premium paid - 68.95

Call OPTSTK
Reliance1350 Call Net premium Paid -41

unexercised
Net Profit 22.05
120
TABLE 19.2
RELIANCE Payoff from 2 Net payoff from 1 Net payoff from 1 Net Pay offs(Rs)
Ltd. Closes at ATM Reliance ITM Reliance 1230 OTM Reliance 1350
(Rs) on 1290 Call sold . Call Bought (Rs). Call purchased (Rs)
expiry. (Rs.)
0 (Max) +132 -105 -41 -14
1000 +132 -105 -41 -14
1200 +132 -105 -41 -14
1244 +132 -91 -41 0
1266.05 +132 -68.95 -41 +22.05
1300 +112 -35 -41 +36
1336 + 40 +1 -41 0
1400 -88 +65 +9 -14
2000 -1288 +665 +609 -14
ANALYSIS:
A long Call Butterfly is to be adopted when the investor is expected very little movement
in the stock price / index. The investor (Ms. Manjushree) is looking to gain from low
volatility at a low cost. As the strategy can be done by selling 2 ATM Calls of Rs. 1290
at premium of Rs. 66 each unit, buying 1 ITM Cal of Rs. 1230 at a premium of Rs.105,
and buying 1 OTM Call options of Rs.1350 at premium of Rs. 41 (there equidistance
between all the strike prices). Result of this strategy is positive incase the RIL Ltd.
remains range bound as we can see from the above pay off table of Investor Ms
Manjushree and maximum risk of loss is till the net debit of the investor i.e., Rs. 14 only.
121
STRATEGY 20: SHORT CALL BUTTERFLY: BUY 2 ATM CALL OPTIONS, SELL 1
ITM CALL OPTION AND SELL 1 OTM CALL OPTION.
A Short Call Butterfly is a strategy for volatile markets. It is the opposite of Long
Call Butterfly, which is a range bound strategy. The short Call Butterfly can be
constructed by Selling one lower striking in-the-money Call, buying two at-the-money
Calls and selling another higher strike out-of-the-money Call, giving the investor a net
Credit (therefore it is an income strategy). There should be equal distance between each
strike. The resulting position will be profitable in case there is a big move in the stock /
index. The maximum risk occurs if the stock / index are at the middle strike at
expiration. The maximum profit occurs if the stock finishes on either side of the upper
and lower strike prices at expiration. However, this strategy offers very small returns
when compared to straddles, strangles with only slightly less risk. Let us understand this
with an example.
When to Use: You are neutral on market direction and bullish on volatility. Neutral
means that you accept the market to move in either direction – i.e. bullish and bearish.
Risk: limited to the net difference between the adjacent strikes (Rs. 100 in this
example) less the premium received for the position.
Reward: Limited to the net premium received for the option spread.
Break even Point:
Upper Breakeven Point = Strike Price of Highest Strike Short Call – Net Premium
Received.
Lower Breakeven Point = Strike Price of Lowest Strike Short Call + Net Premium
Received.
122

) )
2 Dec 24 Dec 1110 112.0 124.6 78.00 85.00 85.00 1109.40

0 0
2 Dec 24 Dec 1050 120.0 120.0 110.0 115.00 115.00 1109.40

0 0 0
2 Dec 24 Dec 1170 85.00 90.90 55.00 60.00 60.00 1247.00

INTERPRETATION:
When RIL Ltd. Is currently trading at Rs. 1109.40 as on 2 Dec 2008, then an investor
expects large volatility in the RIL Ltd. Irrespective of which direction the movement is,
upward or downward. The Investor Buys 2 ATM RIL Ltd. Call options with a strike
price of Rs. 1110 at a premium of Rs. 85 each unit, sells 1 ITM RIL Ltd. Call option with
a strike price of Rs. 1050 at a premium of Rs. 115 and sells 1 OTM RIL Ltd. Call option
with strike price 1170 at a premium of Rs. 60. The net credit is Rs. 5. The profit in this
strategy is maximum for the Investor.
123
TABLE 20.1
STRATEGY- SHORT CALL BUTTERFLY: BUY 2 ATM CALL OPTIONS, Per unit
SELL 1 ITM CALL OPTION AND SELL 1 OTM CALL OPTION. (Rs)
On 1st Dec 2008, Reliance (Underlying) 1109.40
Investor Buy 2 (ATM) Reliance Strike price (K) 1110

OPSTK(CA)
Pays 85*2 Premium (P) 170
Sells 1 (ITM) Reliance Strike price (K) 1050

OPSTK (CA)
Sells 1(OTM) Reliance Strike price(K) 1170

OPSTK(CA)
Receives Premium 60
Net Premium Received 175 – 170 5
Upper break even point = Strike Price of Highest Strike 1165

Breakeven point Short Call – Net Premium
Received.
Lower break even point. = Strike Price of Lowest Strike 1055

Short Call + Net Premium
Received
Underlying worth on 24 Dec, 2008 (expiry) 1247
Activity Reliance 1110 call Exercised Payoff +104
Exercises 1050 Reliance Call Payoff - 82

OPTSTK (by Buyer)
Reliance 1170 Call Payoff - 17

Exercised (by Buyer)
Net Profit +5
124
TABLE 20.2
RELIANCE Payoff from 2 Net payoff from 1 Net payoff from 1 Net Payoff (Rs)
Ltd. Closes ATM Reliance ITM Reliance 1050 OTM Reliance
at (Rs) on 1110 Call Call sold(Rs). 1170 Call sold
expiry. Bought(Rs.) (Rs)
0 (Max) - 170 + 115 + 60 +5
500 - 170 + 115 + 60 +5
900 -170 + 115 + 60 +5
1055 - 170 + 110 + 60 0
1100 - 170 + 65 + 60 - 45
1165 - 60 0 + 60 0
1247 + 104 - 82 - 17 +5
1500 + 610 - 335 - 270 +5
ANALYSIS:
The Short Call Butterfly is a strategy for volatile markets. It is the opposite of Long Call
Butterfly, which is a range bound strategy. The investor constructed this strategy by
selling one lower ITM Call of strike price of Rs. 1050 at a premium of Rs. 115, buying
two ATM Calls with strike price of Rs. 85. Each unit and selling another higher strike
OTM Call of strike price Rs. 1170 at premium of Rs. 60 giving the investor a net Credit
of Rs. 5 per unit and therefore it is an income strategy for the investor. The strategy will
be profitable if there is a big move in the RIL Ltd OPSTK. The maximum risk occurs if
the RIL Ltd. OPSTK is at the middle strike at expiration.
125
STRATEGY 21: LONG CALL CONDOR: BUY 1 ITM CALL OPTION (LOWER
STRIKES), SELL 1 ITM CALL OPTION (LOWER MIDDLE), SELL 1 OTM CALL
OPTION (HIGHER MIDDLE), and BUY 1 OTM CALL OPTION (HIGHER STRIKE)
A long Call Condor is very similar to a long butterfly strategy. The difference is
that the two middle sold options have different strikes. The profitable area of the pay off
profile is wider than that of the Long Butterfly (see pay-off diagram).
The strategy is suitable in a range bound market. The Long Call Condor involves
buying 1 ITM Call (Lower strike), selling 1 ITM Call (lower middle), selling 1 OTM call
(higher middle) and buying 1 OTM Call (higher strike). The long options at the outside
strikes ensure that the risk is capped on both the sides. The resulting position is profitable
if the stock / index remains range bound and shows very little volatility. The maximum
profits occur if the stock finishes between the middle strike prices at expiration.
When to Use: When an investor believes that the underlying market will trade in a range
with low volatility until the options expire.
Risk: limited to the minimum of the difference between the lower strike call spread less
the higher call spread less the total premium paid for the condor.
Reward: Limited. The maximum profit of a long condor will be realized when the stock
is trading between the two middle strike prices.
Break even Point:
Upper Breakeven Point = Highest Strike– Net Debit.
Lower Breakeven Point = Lowest Strike + Net Debit.
126

) )
5 26 June 2190 125.00 140.0 95.00 136.00 136.00 2246.80

June 0
5 26 June 2220 91.00 120.0 86.00 118.00 118.00 2246.80

June 0
5 26 June 2250 100.00 105.0 68.00 98.00 98.00 2246.80

June 0
5 26 June 2280 89.05 95.00 61.00 91.00 91.00 2239.55

June
INTERPRETATION:
RIL Ltd. Is currently trading at 2246.80 as on 5 June 2008. The investor expects little
volatility in RIL Ltd. And expects the market to remain range bound. So Investor buys 1
ITM RIL Ltd. Call option with a strike price of Rs. 2190 at a premium of Rs. 136.00,
sells 1 ITM RIL Ltd. Call option with strike price of Rs. 2220 at a premium of Rs. 118,
sells 1 OTM RIL Ltd. Call option at Rs. 2250 as the strike price with premium of Rs. 98
and buys 1 OTM RIL Ltd. Call option with a strike price of Rs. 2280 at a premium of Rs.
91. The net debit is Rs. 11.
127
TABLE 21.1
STRATEGY- : LONG CALL CONDOR : BUY 1 ITM CALL OPTION (LOWER Per unit
STRIKES), SELL 1 ITM CALL OPTION (LOWER MIDDLE), SELL 1 OTM CALL (Rs)
OPTION (HIGHER MIDDLE), BUY 1 OTM CALL OPTION (HIGHER STRIKE)
On 5 June 2008 Reliance (Underlying) 2246.80
The Investor has a range Bought 1 ITM Reliance Call Strike Price 2190
bound view and created a
Long Call Condor Premium Paid 136
Sold 1 ITM Reliance Call Strike Price 2220
Premium Received 118
Sold 1 OTM Reliance Call Strike Price 2250
Premium Received 98
Bought 1 OTM Reliance Call Strike Price 2280
Premium Paid 91
Net Premium Paid 11
Upper Breakeven Higher Strike 2269

Break Even Points
– Net Debit
Lower Break Even Lower Strike 2201

+ Net Debit
On 26th June 2008, Reliance Closed at 2239.55
Activity Buy Reliance 2190 Call Exercised Payoff (Debit) - 86.45
Sell Reliance 2220 Call Exercised (by Payoff + 98.45

Buyer) (Credit)
Sell Reliance 2250 Call Exercised (by Payoff + 98

Buyer) (Credit)
Buy Reliance 2280 Call Exercised Payoff - 91

(Credit)
Net Profit + 19
128
TABLE 21.2
RELIANCE Net Payoff Net Payoff Net Payoff Net Payoff from 1 Net Pay off(Rs.)
Ltd. Closes from 1 ITM from 1 ITM from 1 OTM OTM Reliance 2280
at (Rs) on Reliance 2190 Reliance Reliance Call Bought (Rs)
expiry. Call 2220 Call 2250 Call
Bought(Rs.) sold (Rs). Sold (Rs)
0 (Max) -136 +118 +98 -91 -11
1500 -136 +118 +98 -91 -11
2000 -136 +118 +98 -91 -11
2201 -125 +118 +98 -91 0
2239.55 -86.45 +98.45 +98 -91 +19
2269 - 57 + 69 + 79 - 91 0
2300 -26 +38 +48 -71 -11
2500 +174 -162 -152 +129 -11
ANALYSIS:
This strategy is suitable in a range bound market. The Long Call Condor involves buying
1 ITM Call (Lower strike) with a strike price of Rs 2190 at a premium of Rs. 136, selling
1 ITM Call (lower middle) at a strike price of Rs.2220 with a premium of Rs. 118,
selling 1 OTM call (higher middle) at a strike price of Rs. 2250 with a strike price of Rs.
98 and buying 1 OTM Call (higher strike) with the strike price of Rs. 2280 at a premium.
The profitable area of the pay off profile is wider than that of the Long Butterfly. The
long options at the outside strikes ensure that the risk is capped on both the sides. The
resulting position is profitable if the RIL Ltd. OPSTK remains range bound and shows
very little volatility. The maximum profits occur if the stock finishes between the middle
strike prices at expiration.
129
STRATEGY 22: SHORT CALL CONDOR: SHORT 1 ITM CALL OPTION
(LOWER STRIKES), LONG 1 ITM CALL OPTION (LOWER MIDDLE), LONG
1 OTM CALL OPTION (LOWER MIDDLE), LONG 1 OTM CALL OPTION
(HIGHER MIDDLE), SHORT 1 OTM CALL OPTION (HIGHER STRIKE)
A short call condor is very similar to short butterfly strategy. The difference is that the
two middle bought options have different strikes. The strategy is suitable in a volatile
market. It involves a selling 1 ITM Call (Lower Strike), buying 1 ITM Call (Lower
middle), Buying 1 OTM Call (Higher Middle) and selling 1 OTM Call ( Higher Strike)
The resulting this position is profitable if the stock /index shows very high volatilility
and there is a big move in the stock /index. The maximum profit occurs if the stock/index
finishes on either side of the upper or lower strike prices at expiration.
When to Use: When an investor believes that the underlying market will break out of
trading range but is not sure in which direction.
Risk: Limited. The maximum loss of a short condor at occurs at the center of the
option spread.
Reward: Limited. The maximum profit of a long condor will be realized when the stock
is trading between the two middle strike prices.
Break even Point:
Upper Breakeven Point = Highest Strike– Net Credit
Lower Breakeven Point = Lowest Strike + Net Credit.
130

1 24 April 2310 89.00 125.00 68.25 115.00 115.00 2345.

April
1 24 April 2340 66.25 109.00 60.00 93.00 93.00 2345.

April
1 24 April. 2370 48.00 89.00 48.00 89.00 89.00 2345.

April
1 24 April 2400 48.00 77.40 36.30 70.00 70.00 2582.65

April
INTERPRETATION:
On 1 April 2008 RIL Ltd. Is trading at Rs.2345. An Investor expects high volatility in
RIL Ltd and expect s the market to break open significantly on any side. An investor
sells 1 ITM RIL Ltd call option with strike Price of Rs.2310 at a premium of Rs.115,
buys 1 ITM RIL Ltd. Call option with a strike price of Rs. 2340 at a premium of Rs.93,
buys a RIL Ltd. Call option with a strike price of Rs. 2370 at a premium of Rs. 89 and
sells 1 OTM call option of RIL Ltd with a strike price of Rs.2400 at a premium of Rs.70.
The net credit is of Rs. 3.
131
TABLE 22.1
STRATEGY- : SHORT CALL CONDOR : SHORT 1 ITM CALL OPTION (LOWER Per unit
STRIKES), SELL 1 ITM CALL OPTION (LOWER MIDDLE), LONG 1 ITM CALL (Rs)
OPTION (LOWER MIDDLE), LONG 1 OTM CALL OPTION (HIGHER STRIKE),
SHORT 1 OTM CALL OPTION (HIGHER STRIKE)
On 1st April 2008 Reliance (Underlying) 2345.25
The Investor has a range Sell 1 ITM Reliance Call Strike Price 2310
bound view and created a
Long Call Condor Premium Received 115
Buy 1 ITM Reliance Call Strike Price 2340
Premium Paid 93
Buy 1 OTM Reliance Call Strike Price 2370
Premium Paid 89
Sold 1 OTM Reliance Call Strike Price 2400
Premium Received 70
Upper Breakeven Higher Strike 2397

Break Even Points
– Net Credit
Lower Break Even Lower Strike 2313

+ Net Credit
On 24th April 2008, Reliance Closed at 2582.65
Activity Sold Reliance 2310 Call Exercised (by Payoff -157.65

Buyer) (Debit)
Buy Reliance 2340 Call Exercised Payoff + 149.65

(Credit)
Sell Reliance 2370 Call Exercised (by Buyer) Payoff + 123.65

(Credit)
Buy Reliance 2400 Call Exercised Payoff - 112.65

(Credit)
Net Profit +3
132
TABLE 22.2
RELIANCE Payoff from 1 Net payoff from 1 Net payoff From Net pay off Net
Ltd. Closes ITM Reliance ITM Reliance 1 OTM Reliance from 1 OTM Payoff(Rs.)
at (Rs) on 2310 call sold 2340 Call 2370 call reliance
expiry. at (Rs.) Purchased (Rs). purchased. (Rs) 2400 call
sold (Rs.)
0 (Max) +115 -93 -89 +70 +3
1000 +115 -93 -89 +70 +3
2000 +115 -93 -89 +70 +3
2200 +115 -93 -89 +70 +3
2313 +112 -93 -89 +70 0
2350 +75 -83 -89 +70 -27
2397 +28 -36 -62 +70 0
2582.65 -157.65 +149.65 +123.65 -112.65 +3
2700 -275 +267 +241 -230 +3
3000 -575 +567 +541 -530 +3
.....
ANALYSIS:
A short call condor is very similar to short butterfly strategy. This strategy is suitable in a
volatile market. It involves a selling 1 ITM Call (Lower Strike) with strike price of
Rs.2310, buying 1 ITM Call (Lower middle) with a strike price of Rs.2340, Buying 1
OTM Call (Higher Middle) with a strike price of Rs.2370 and selling 1 OTM Call
(Higher Strike) with a strike of Rs. 2280.The resulting this position is profitable if the
RIL Ltd. OPSTK shows very high volatilility and there is a big move in the RIL ltd.
OPSTK.
CHAPTER-5
133
 Observation
 Conclusion
 Suggestion
 Bibliography
OBSERVATION
134
 Various option strategies are available to the investor for different market
circumstances to capture the market potential ant limit the risk of loss. So these
available option strategies provide a grip to the investor against the unexpected
changes in market conditions.
 There are some strategies which are applicable for BULLISH MARKET and
BEARISH MARKET situation. So depending upon the prevailing situation, the
investor can adopt any strategy out of available strategies to increase the income
from the investment in the market by using an option contract.
 In Indian capital market Index option are more active then Option stocks, So
option stock require more investor participation.
 As the option stock are exchange traded options & form an class of option which
have standardized contract features and traded on public exchanges, and facilitate
trading among the large number of investor and due to this feature they provide
settlement guarantee by clearing corporation and there by reducing the counter
party risk.
 Option can be used for hedging, because option investor always take a view on the
future direction of the market, for arbitrage or for implementing strategies which
can help in generating income for investor under various market conditions.
135
CONCLUSION
 Options are the special of derivative instruments that can be used to hedge as
well as to speculate.
 Different options can be com
 Many strategies combined to create different synthetic instruments which will
match the risk and return profile of the option user.
 Options can also be used to create portfolios with unique features capable of
achieving investment objectives not attainable with other derivatives products.
 Many option strategies can be employed by investors in their assets and liabilities
management decisions. For instance, an investor can purchase or sell either a call
option or a put option alone (naked option strategy), trade the option with
underlying assets at the same time (hedging strategies), or combine calls and puts
in one transaction (combination strategies).
136
SUGGESTIONS
 More investor awareness should be given on use of derivative as financial
instrument in the capital market investment, so as to hedge against the risk of loss.
 Exchange and service organization should provide more investor education on
usage of option contract to tap the market potential to earn more income with less
investment.
 More training and workshop facility should be given to the aggressive investor who
are risk taker, and made them aware of usage of option contract at appropriate time
to properly handle the different market circumstance.
 Adequate information should be given to investor, so that the investor can properly
contemplate the market prospect and work accordingly by forming the suitable
option contract.
137
BIBLOGRAPHY
 Book – Option futures and other derivatives - John c Hulls.
 Investment analysis and management – Jack Clark Francis.
WEBLOGRAPHY
 www.nseindia.com – NSFM Modules
www.google.com
138

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A

A PRAGMATIC STUDY ON VARIOUS OPTION STRATEGIES AND ITS

IN GEOJIT BNP PARIBAS FINANCIAL SERVICES LTD.

HALL TICKET NO : 008-08-156

PROJECT SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD

MASTER OF BUSINESS ADMINISTRATION 2008-2010

DEPARTMENT OF BUSSINESS MANAGEMENT

BADRUKA COLLEGE P.G CENTRE

OPTION STRATEGIES AND ITS

VARIOUS OPTION STRATEGIES AND ITS APPLICATION” submitted by me to

the Department of Business Management, Osmania University, Hyderabad, is a bonafide

of any degree/diploma certificate or published anytime before.

Hall Ticket No: 00808156

valuable insight before making any investment.

option in the financial capital market.

capture the market potential.

this project successfully.

throughout the entire project work.

TABLE 13.1 & 13.2 92 - 93

TABLE 14.1 & 14.2 96 - 97

TABLE 16.1 & 16.2 104 - 105

TABLE 17.1 & 17.2 108 - 109

TABLE 18.1 & 18.2 112 - 113

TABLE 19.1 & 19.2 117 - 118

TABLE 20.1 & 20.2 121 - 122

TABLE 21.1 & 21.2 125 - 126

TABLE 22.1 & 22.2 129 - 130

instrument is increasingly traded in the Indian capital market.

Indian financial sector.

Options form an important class of derivative which have standardized contract

investors. They Provide settlement guarantee by the Clearing Corporation thereby

strategies which can be used either for hedging or for speculation.

Many option strategies can be employed by investors in their assets and

 To know the implementation of various option strategies which can help in

generating income for the Investors under various market conditions.

by knowing the uses of option in the financial market.

LIMITATION OF THE STUDY

 The project is restricted only to option stock.

cannot be guarantying any future movement of the stock.

 Price of option stock for period of 2008-2009.

 National stock exchange site.

 Going through related magazine, details & text Books.

Scope of the study

result will only confine to that period.

 Introduction of derivative instrument in financial

 Role of financial derivative in business and finance.

derivatives are characterized by high leverage.

a derivative is based on asset.(e.g., commodities, equities(stock), residential mortgages,

stock market indices, consumer price index(CPI).

literature. Generally, volatility is considered as a measurement of risk in the stock market

volatility. As a concept, volatility is simple and intuitive.

movements or factors determining these movements. Nath (2003) Shenbagaraman

the future contracts. It provides extra liquidity in the stock market.

as cross-border transactions. Agents in liberalized market economies who are exposed

represent contracts whose payoff at expiration is determined by the price of the

underlying asset—a currency, an interest rate, a commodity, or a stock.

Derivatives are traded in organized stock exchanges or over the counter by

stock markets have become important instruments of price discovery, portfolio

transition economies have started introducing derivative contracts.

for farmers to protect themselves from any decline in the

price of their crops due to delayed monsoon, or overproduction.

establishment of Cotton Trade Association in 1875. Exchange traded financial

exchanges. (Shenbagaraman 2003).