final project
TRANSCRIPT
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A Report of
A STUDY ON OPTIONS TRADING – TRENDS AND STRATEGIES AND
EFFECT ON CUSTOMERS WITH RESPECT TO
GEOJIT BNP PARIBAS FINANCIAL SERVICES LTD.
for
Geojit BNP Paribas Financial Services Ltd. St. Marks Road, Bangalore
Submitted to the
Department of Management Studies
in partial fulfillment of the
Post Graduate Diploma In Management
Under the Guidance of
Mr. Sudheendran M.
By
Mrinalini Shankar
BATCH 18 FK 1847
SCMS – COCHIN
SCMS CAMPUS, PRATHAP NAGAR, MUTTOM, ALUVA, COCHIN-683106.
September 2010
S C M SS C M SS C M S
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DECLARATION
I, the undersigned, hereby declare that this project report entitled
“ Options Trading –Trends and Strategies and effect on customers
with respect to Geojit BNP Paribas Financial Services Ltd ” has
been written and submitted under the guidance of Mr.
Sudheendran M. and is my original work.
I understand that detection of any copying is liable to be punished
in any way the school deems fit.
DATE: Mrinalini Shankar
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SCMS – COCHIN
SCMS CAMPUS, PRATHAP NAGAR, MUTTOM, ALUVA, COCHIN - 683106.
CERTIFICATE
This is to certify that the project work entitled ‘Options Trading –
Trends and Strategies and effect on customers with respect to Geojit BNP
Paribas Financial Services Ltd.’ has been carried out under my guidance
by Mrinalini Shankar in partial fulfillment of her Post
Graduate Diploma in Management during the academic year 2009 -
2011.
DATE: Mr. Sudheendran M
ASST. PROFESSOR
SCMS-COCHIN.
S C M SS C M SS C M S
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SCMS – COCHIN
SCMS CAMPUS, PRATHAP NAGAR, MUTTOM, ALUVA,
COCHIN-683106.
This is to certify that the project work entitled ‘Options Trading –
Trends and Strategies and effect on customers with respect to Geojit BNP
Paribas Financial Services Ltd.’ has been carried out by Mrinalini
Shankar in partial fulfillment of her Post Graduate Diploma in
Management.
DATE Dr. V. Raman Nair
DIRECTOR,
SCMS-COCHIN
S C M SS C M SS C M S
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ACKNOWLEDGEMENT
First and foremost I would like to thank Mr. Biju Kumar (Area Vice President,
Geojit BNP Paribas Financial Services Ltd) and Mr. Karthigeyan M. (Regional
Manager -Geojit BNP Paribas Financial Services Ltd. Bangalore) for allowing me
to do the project in their organization.
I also express my sincere thanks to my company guide, Mr. Uthaman P., Branch
Manager, Geojit BNP Paribas Financial Services Ltd., Bangalore for helping me in
successfully completing the project.
I would like to express my gratitude and sincere thanks to Mr. Sudheendran M.,
my project guide for instilling confidence in me to carry out this study and
extending guidance and encouragement from time to time, without which it would
not have been possible to undertake and complete this project.
I also wish to extend my appreciation to the management and staff of my college
specially Prof. K.J. Paulose (Project Coordinator and Dean- Management Studies),
Dr. Filomina P. George (Dean- Academic Management), and our Director
Dr. V. Raman Nair, for their kind co-operation and support.
I take this opportunity to thank the staff and customers of Geojit BNP Paribas
Financial Services Ltd. for their assistance and for providing valuable information
during the course of the project.
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TABLE OF CONTENTS
SL. NO. TITLE PAGE NO.
1 Executive Summary
2 Chapter 1- Introduction and Theoretical Background 10
3 Chapter 2- Research Methodology 34
4 Chapter 3- Profile
· Company Profile 39
· Industry Profile 41
· Product Profile 45
5 Chapter 4- Data Interpretation and Analysis 50
6 Chapter 5- Findings and Conclusions 72
7 Chapter 6- Suggestions and Recommendations 74
8 Bibliography 77
9 Appendix 78
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LIST OF TABLES
Table No.
TABLE Pg. No.
1.1 Annual Volume of Exchange Traded Derivatives 26
1.2 Global Futures and Options Volume By Category 27
1.3 Top Derivatives Exchanges 28
1.4 BSE Contract Specifications 29
1.5 NSE Contract Specifications 32
3.1 Management 42
3.2 Board of Directors 43
4.1 Education Level of Customers 62
4.2 Brokerage of Geojit with Regard to Derivatives 64
4.3 Correlations - BSE Capital Market Turnover with BSE F&O Turnover 68
4.4 Regression- Model Summary- BSE Turnover with Capital Market Turnover 68
4.5 ANOVA – BSE Turnover with Capital Market Turnover 69
4.6 Coefficients- BSE Turnover with Capital Market Turnover 69
4.7 Correlations - NSE Capital Market Turnover with BSE F&O Turnover 70
4.8 ANOVA- NSE Turnover with Capital Market Turnover 70
4.9 Coefficients- NSE Turnover with Capital Market Turnover 71
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LIST OF FIGURES
Fig. No.
Figure Pg. No.
1.1 Growth in Options Trading Till 2009 25 1.2 Global Volumes in Percentage 28 4.1 Years Of Trading Experience 51 4.2 Level of Satisfaction 52 4.3 Recommendation To Prospective Customers And Acquaintances 53 4.4 Portfolio and Investment Decisions of the Investors 54 4.5 Risk Perception of Customers 55 4.6 Options Trading in American and European Options 57 4.7 Options Trading in Index and Stock Options 57 4.8 (a) Awareness on Options Trading Strategies 59 4.8 (b) Awareness of Customers in Each Strategy 59 4.9 Reasons for trading in Options 60
4.10 Effectiveness of Geojit BNP Paribas Financial Services Ltd. in Implementation of Options Trading 61
4.11 Income Level and Options Trading 63 4.12 Turnover of Index Futures and Options in BSE 65 4.13 Turnover of Stock Futures and Options in BSE 65 4.14 NSE Index Futures and Options 66 4.15 NSE Stock Futures and Options 67 4.16 Aggregate Turnover In Future and Options Segment 67
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EXECUTIVE SUMMARY
The project titled “Options Trading – Trends and Strategy and effect on customers
with respect to Geojit BNP Paribas Financial Services Ltd” is aimed at
understanding the options trading scenario in Geojit BNP Paribas Financial
Services Ltd. Options trading is a mechanism which helps the investors to reduce
their risk and maximize their return. The project also aims to study the reason for
less number of customers trading in options as compared to the equities (cash
market).
For this study, the primary data were collected by directly approaching the
customers and interview of the dealers of various branches in Bangalore.
Secondary data were also collected from the NSE and BSE websites.
From the study, it was found that the customers who deal in options were trading
high volumes. But the number of customers in the same segment is really
negligible. A meager 4% of the customers of the Bangalore main branch have
been trading in options. The customers who do not trade in options were
abstaining themselves from the options trading segment, due to the fact that they
were unable to understand the complexities of options trading. Moreover, they are
not aware of the strategies which can be made use of while trading in options.
The company has wide scope of expansion in the options trading segment. The
number of customers trading in this segment can be increased by focusing mainly
on the working class. Giving more emphasis on online trading can also pave way
to more customers in the options segment.
The company ought to be more proactive in the field of options trading promotion.
It should take steps to promote options trading among the customers. It should
also take steps to educate the customers on the advantages as well as the strategies
that can be followed in the trading of options so to tap the unlimited potential in
this segment.
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Chapter I
Introduction and Theoretical Background
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1. INTRODUCTION
India's economy bounced back with robust industrial growth, improved exports
and strong GDP growth, after a year of reduced economic growth resulting from
the impact of global events. Consequently capital expenditure and infrastructure
investments also showed an increase. Growth had been supported by markets
reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and
real estate boom, and a flourishing capital market. Improved outlook for
investment was visible across the globe and capital markets in most parts of the
world showed bullish sentiments and activity. India was viewed by global investor
community as one of the attractive investment destinations and significant FII
inflows came back into Indian Capital market.
According to the Ministry of Statistics, and Programme Implementation, the
Indian Economy has registered a growth of 7.4% in the year 2009-10 and a year
on year growth of 8.6 % for the last quarter. Improved global sentiment and
strong industrial output numbers in India are increasingly attracting foreign
investors in the country. Other factors being attributed to the revival in foreign
direct investment (FDI) in recent times include increasing consumer confidence.
India has been ranked at the third place in global foreign direct investments in
2009 and will continue to remain among the top five attractive destinations for
international investors during 2010-11, according to United Nations Conference
on Trade and Development (UNCTAD) in a report on world investment prospects
titled, ‘World Investment Prospects Survey 2009-2011' released in July 2009.
Market volumes are more than 100,000 crores. The amount of trading in cash has
been unchanged since 2007. In July 2007, average daily volumes in stocks on the
National Stock Exchange (NSE) were about 12,200 crores - which makes the
average July 2010 trading volume of 12,600 crores horribly flat, even when nearly
300 more stocks were listed or traded in the interim.. The growth has largely been
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in derivatives, and there, in the options market. India has a very vibrant stock
futures market, which some say is the biggest in the world. But stock and index
futures have traded a daily average of 33,000 crores in July 2010 - much lower
than the 40,000 crores in July 2007, three years ago.
(Source: http://in.news.yahoo.com/columnist/deepak_shenoy/14/of-options-and-
choices)
1.1 OPTIONS
In the world of investment, trillions of dollars of worth of shares are traded a day.
On any given day, traders and investors can take part in the purest form of
capitalism by putting their money at risk by buying into any of the major global
corporations across the planet in the pursuit of profit. Yet another way of
speculating is trading options which are far superior to trading in stocks. Option is
defined as:
“The right, but not the obligation, to buy (for a call option) or sell (for a put
option) a specific amount of a given stock, commodity, currency, index, or debt, at
a specified price (the strike price) during a specified period of time.”
Options trading provide the investor with leverage. Leverage is the ability to use a
small amount of capital to control a huge asset. In options, a small payment as
premium allows the investor to trade in a much higher value asset which is an
underlying asset.
Another advantage is that a trader can generate income by using credit spreads
with options. Additionally, if a stock is rumored to miss its earning projections the
investors can make a lot of money quickly by playing negative earning releases in
the right market environment. The reason is that stocks can often go down by 50%
or more on bad news. That translates into a huge profit to a smart option trader
without tying up a lot of capital.
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The "growth in volumes" is mainly due to the trading in Index options. Three
years ago, a modest volume of Rs. 4200 crores per day has now become 46,000
crores, a tenfold increase. Trading has dramatically increased in the index options
market - specifically, the Nifty options market. Nifty options are European
options. European option preference is a structural problem with the exchanges.
Sellers of (American) stock options have the "risk of exercise".
Another reason option volumes look enormous is the way options are accounted
for. A single Nifty contract is displayed as a volume of about Rs. 2.5 lakhs (50
Nifty at the 5990 mark (as on September 22, 2010) ). The actual premium for the
contract may only be Rs. 1000 (at Rs. 20 per Nifty). In effect what we see is just
'notional', with actual transaction amounts being a fraction smaller of the reported
volume number. The other side of the coin is that, people make lot of unhealthy
assumptions about volatility. The VIX - a volatility index based on option
premiums - gives an idea of volatility in the market. The VIX is now about 19,
versus the historical average of 35. Option premiums indicate market expectations
of just a 2% move in the benchmark index over the month of August 2010.
1.1.1 TERMINOLOGY IN OPTIONS TRADING
o Index options: These options have the index as the underlying. In India,
they have a European style settlement. Eg. Nifty options, Mini Nifty
options etc.
o 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.
o 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.
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o 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.
o Call option: A call option gives the holder the right but not the obligation to
buy an asset by a certain date for a certain price. A call option is defined as
an option contract which gives the buyer the right, but not the obligation, to
buy shares of an underlying security at a specific price for a specified time.
The seller of a call option has the obligation to sell the underlying security
if and only the buyer exercises his option to buy.
For example, a buyer of one AAA April 50 call options has the right to buy
100 shares of AAA at Rs.50 till April expiration date. The buyer may
purchase these shares by filing an exercise notice through a broker prior to
the expiration date of the call option.
o Put Option: An option contract which gives the holder the right, but not the
obligation, to sell a certain quantity of an underlying security to the writer
of the option, at a specified price up to a specified date is called as put
option. The writer of a put option has the obligation to buy the underlying
security if the holder of the put option exercises his option to sell.
For example, the buyer of one AAA April 50 put option has the right to sell
100 share of AAA at Rs. 50 till April expiration date. The buyer may sell
these shares by filing an exercise notice to the broker prior to the expiration
date of the put option.
o 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.
o Expiration date: The date specified in the options contract is known as the
expiration date, the exercise date, the strike date or the maturity.
o Strike price: The price specified in the options contract is known as the
strike price or the exercise price.
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o American options: American options are options that can be exercised at
any time up to the expiration date.
o European options: European options are options that can be exercised only
on the expiration date itself.
o In-the-money option: An in-the-money (ITM) option is an option that
would lead to a positive cash flow to the holder if it were exercised
immediately. A call option on the index is said to be in-the-money when the
current index stands at a level higher than the strike price (i.e. spot price >
strike price). If the index is much higher than the strike price, the call is
said to be deep ITM. In the case of a put, the put is ITM if the index is
below the strike price.
o 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).
o Out-of-the-money option: An out-of-the-money (OTM) option is an option
that would lead to a negative cash flow if it were exercised immediately. A
call option on the index is out-of-the-money when the current index stands
at a level which is less than the strike price (i.e. spot price < strike price). If
the index is much lower than the strike price, the call is said to be deep
OTM. In the case of a put, the put is OTM if the index is above the strike
price.
1.2 BRIEF HISTORY OF OPTIONS
Literatures failed to record the first option contract traded. However it has been
recorded that similar to modern options contract the Romans and the Phoenicians
did contracts in shipping as early as 17th century. Evidences suggest that the
Greek mathematician and philosopher, Thales used options to enter into a contract
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to obtain olive presses at a low price in advance before the harvest season
anticipating that the harvest will be good. At the time of good harvest the demand
for olive presses increased and he lent those for higher prices than he had given to
secure these presses. This type of securing things at lower prices and selling at
higher prices is the basic idea behind options trading. Similar situation prevailed in
Holland where tulip options were traded and in London also options were traded.
But all these were done by speculators and in unregulated markets. Hence in the
early 18th century options were declared illegal in London.
1.3 BASIC CONCEPTS IN OPTIONS
Entering into an option contract means the investor is taking a position on a stock
(or related option) in a derivative market. With the basic types of options available
several variations of options positions are made. The position entered is either
termed as long or short. The long position is taken by those investors who are
bullish about the market while the short position is entered by those who are
bearish about the market.
The following type of investors depending on their financial goals and investment
objectives should consider options trading :
o Investors who wish to participate in the market without trading or holding a
large stock portfolio.
o Investors with strong market views and its future movement and want to
take the advantage of the situation.
o Investors who follow the equity market closely.
o Investors who want to protect the value of their diversified equity portfolio
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1.4 RISKS IN OPTIONS
Two types of risks are associated with options the price movement of the
underlying and the changes in volatility. Factors contributing to these risks are
many and varied. Some of the prominent factors are the state of economy, supply
and demand factors in the options market and in other related markets. The factors
affecting the values of the various underlying assets and those affecting the
volatility, liquidity and efficiency of the markets or other markets also contributes
to the risk. Other factors that may affect the pricing of particular options, the
quality or operations of the various options markets at any particular time and the
procedures of the various options markets etc also affects the risk associated with
options. Risks are generally of same type to all underlying assets.
The options holder has to encounter some of the following risk like the risk of
losing the premium paid to purchase the option in a short period or if the investor
enters into short position time decay will have tremendous effect and it so happens
that the out of the money options with shorter time expiry will suffer more.
Risks associated with an option writer will be the assignment of exercise of the
options at any time during the period of the life of option. Writer of the covered
call has to forgo the opportunity of gaining more money from the increase in the
value of the underlying stock. The naked call writer is highly in risk state and may
incur unlimited loss if the underlying price increases above the strike price.
1.5 VOLATILITY IN OPTIONS MARKET
Volatility is an important factor to be considered in options trading. Volatility is a
measure of the rate of change in the market movement in a given time either in the
upward or downward direction. If volatility is high then the premium on the option
will be high and volatility is low the premium will be relatively low. Two types of
volatility are :
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o Statistical volatility and
o Implied volatility.
While statistical volatility is the measure of actual price changes over the specified
period of time, the implied volatility is the measure of how much the market
expects the asset price to move for an option price.
Volatility is one of the variables in option-pricing formulas showing the extent to
which the return of the underlying asset will fluctuate between now and the
option's expiration. A good understanding about the volatility is required for
options trading.
1.6 TRADING STRATEGIES IN OPTIONS
A. Single Options
In single options strategy only one type and one option contract is involved. The
most common single options strategies are the covered call and the protective put.
1. Covered Call Strategy
In the Covered Call Strategy, the investor takes a long position on the call option
and writes a call on the same underlying which he already owns. This helps him to
generate income from the same asset. This is often called a buy-write position.
Here the investor is having a short-term neutral view about the market and hence
will enter into long position. This strategy helps to enter into a hedge position
since protection from the decline in stock price is made by writing a covered call.
The risk and reward associated with this strategy is low. In this strategy the main
two risks involved are the possibility of the stock price going down to zero or to
relinquish the profit if the stock price shoots up drastically. This is a single option
strategy as only one type of option comes into picture.
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2. Protective Put
In the Protective Put Strategy, the stockholder (investor) buys protective put for
the stocks he already owns. The investor who is more concerned about the
downside risk of the market and who does not wish to sell his stock enters into this
strategy. By entering into this strategy the investor is trying to protect his
unrealized profit (if any). The risk associated with this strategy is limited or the
maximum loss is limited to the strike price (stock purchase price + premium paid)
and the return or the maximum profit is unlimited as the investor can gain from
two-way or rise/fall of market movement.
B. Options Combinations
In options combinations either both type of options (put or call) or more than one
option contract is involved. Outlined below are some of the strategies which
involve options combinations.
1. Straddles and Strangles
An investor enters into either the straddle or strangles position when he thinks that
the underlying asset is highly volatile but is not sure of the direction of movement
of the market.
A Straddle Position is entered either by buying a call and a put option with the
same strike price and same expiration date (straddle buyer) or by selling a call and
a put option with the same strike price and expiry date (straddle seller).
A Strangle Position is entered either by buying a call and a put option at two
different strike prices but with same expiration date (strangle buyer) or by selling a
call and a put option at different strike prices (strangle seller).
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2. Strips & Straps
A Strip is created by buying one call option and selling two put options with the
same exercise price and exercise date. The Strap is created in the opposite way.
3. Spread Strategies
Spread Strategies are also option combination strategies. This strategy involves a
combination of two or more options on the same underlying but different strike
prices. The most common spread strategy positions are discussed below.
i. Bull Spread
Bull Spread is a strategy which involves the sale and purchase of calls and puts
that will produce maximum profit when there is a rise in price of the stock or the
underlying asset.
ii. Bear Spread
Bear Spread is a strategy which involves the purchase and sale of calls or puts that
will produce maximum profits when there is a fall in the price of the stock or the
underlying asset.
iii. Calendar Spread (Time Spread)
A spread involving simultaneous purchase or sale of options on the same
underlying stock with different expirations is known as a Calendar Spread.
Calendar spread is also known as Time Spread. Calendar spread can be further
divided into two specific variations namely Horizontal spread and Diagonal
spread. In horizontal spread, the option has identical striking prices but different
expiration dates, whereas in diagonal spread, the option has different strike prices
and different expiration dates.
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iv. Box Spread
The combination of a bull spread and a bear spread opened at the same time on the
same underlying stock is known as a Box Spread. This strategy is designed to limit
risk as well as potential profits. Also regardless of which direction the stock moves
this strategy produces a profit on either side.
v. Ratio Spread
Ratio Spread is a strategy in options trading that involves buying a number of
options and selling more options of the same underlying stock and same expiration
date but at a different strike price. This strategy is used when the underlying stock
will experience little volatility in the near term.
vi. Ratio Calendar Spread
A strategy involving a different number of options on the long side of a transaction
from the number on the short side, where the expiration dates for each side are
different. (This strategy creates two separate profit and loss zone ranges, one of
which disappears upon the earlier expiration).
vii. Ratio Calendar Combination Spread
A strategy involving both a ratio between purchases and sales and a box spread.
(Long and short positions are opened on options with the same underlying stock,
in varying number of contracts and with expiration dates extending over two or
more periods. This strategy is designed to produce profits in the event of price
increases or decreases in the market value of the underlying stock.)
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viii. Butterfly Spread
A strategy involving open options in one striking price range, off-set by
transactions at higher and lower ranges at the same time. This strategy offers both
limited risk and limited profit potential.
ix. Condor Spread
A strategy involving four options and four strike prices that has both limited risk
and limited profit potential. A long call condor spread is established by buying one
call at the lowest strike, writing one call at the second strike, writing another call
at the third strike, and buying one call at the fourth (highest) strike. This spread is
also referred to as a flat-top butterfly.
x. Credit Spread
A spread strategy which is an outcome of the difference between the values of two
options, where the value of the option sold is greater than the value of the option
purchased.
xi. Debit Spread
A spread strategy which is an outcome of the difference between the values of two
options, where the value of the option purchase is greater than the value of the
option sold.
xii. Diagonal Spread
Diagonal spread is an option strategy where the purchase of one option and
writing of another with different expiration dates and exercise prices is carried out
simultaneously.
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xiii. Vertical Spread (Money Spread)
An option strategy where simultaneous purchase of one option and writing of
another with same expiration dates, having different exercise prices creates a
vertical spread is the strategy in Vertical Spread.
1.7 OPTIONS TRADING VOLUME AND OPEN INTEREST
Price movements in the options market result from the decisions of millions of
traders. But there are a number of useful statistics besides price movements that
reflect what those other market participants are doing. Two factors to be
considered while trading options are daily trading volume and open interest.
Daily Trading Volume
Trading volume gives the important insight into the strength of the current market
direction for the option's underlying stock. The volume, or market breadth, is
measured in shares and tells a person how meaningful the price movement in the
market is.
Keep in mind that trading volume is relative and needs to be compared to the
average daily volume of the stock in question. A large percentage change in price
accompanied by larger than normal volume is a solid indication of market strength
in the direction of the change. But large percentage increases in price accompanied
by small trading volumes are less likely to indicate a market direction. In fact, they
may indicate that a reversal is likely in the near term.
The Importance of Open Interest
Open interest is always one of the data fields on most option quote displays -
along with bid price, ask price, volume and implied volatility - many traders
ignore open interest. But while it may be less important than the option's price, or
even current volume, open interest provides useful information that should be
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considered when entering an option position. Unlike stock trading, in which there
is a fixed number of shares to be traded, option trading can involve the creation of
a new option contract when a trade is placed. Open interest will tell a person the
total number of option contracts that are currently open - in other words, contracts
that have been traded but not yet liquidated by either an offsetting trade or an
exercise or assignment.
When a person buys or sells an option, the transaction needs to be entered as either
an opening or a closing transaction. If a person buy 10 of the Infosys March 27.5
calls, a person are buying the calls to 'open'. That purchase will add 10 to the open
interest figure. If a person wanted to get out of the position, a person would sell
those same options to 'close' and open interest would then fall by 10.Selling an
option can also add to the open interest. If a person owned 1,000 shares of Infosys
and wanted to do a call by selling 10 of the March 27.5 calls, a person would be
entering a sale to open. Since it is an opening transaction, it would add 10 to the
open interest. If a person later wanted to repurchase the options, a person would
enter a transaction to buy to close. Open interest would then decrease by 10.
Things get a little more complicated if the options a person trade is not created by
the transaction, but instead the other side is taken by someone doing a closing
transaction. For example, if a person is buying 10 of the Infosys March 27.5 calls
to open, and a person are matched with someone that is selling 10 of the Infosys
March 27.5 calls to close, then the total open interest number will not change.
So when a person are looking at the total open interest of an option, there is no
way of knowing whether the options were bought or sold - which is probably why
many option traders ignore open interest altogether. However, a person shouldn't
assume that the open interest figure provides no important information.
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One way to use open interest is to look at it relative to the volume of contracts
traded. When the volume exceeds the existing open interest on a given day, this
suggests that trading in that option was exceptionally high that day. Open interest
can help a person determine whether there is unusually high or low volume for any
particular option. Open interest also gives a person key information regarding the
liquidity of an option. If there is no open interest for an option, there is no
secondary market for that option. When options have large open interest, it means
they have a large number of buyers and sellers, and an active secondary market
will increase the odds of getting option orders filled at good prices. So, all other
things being equal, the bigger the open interest, the easier it will be to trade that
option at a reasonable spread between the bid and ask.
1.8 GROWTH IN OPTIONS TRADING
The growth of options trading in the global scenario has been depicted in the graph
shown below.
Figure 1.1 Growth in Options Trading Till 2009
Source: http://futures industry.org
The growth has been stagnant is the last two years. But the later years showed a
steady growth.
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1.9 ANNUAL VOLUMES IN EXCHANGE TRADED DERIVATIVES
The annual volumes of futures and options have been shown in the table given
below. The table shows that the annual volumes in the U. S. Exchange were
showing steady increase till 2008. The slight decrease in the options volumes
could be due to the economic downturn that affected the economy during the
period.
At the same time the volumes in Non U. S, Exchanges were showing a trend of
increase but the pace at which the options volume changed was reduced. It could
be seen from the table that a change of 20.06% in 2007. The percentage change
was reduced to 8.17% in 2008 and to 5.21% in 2009. That clearly indicates that
the volumes were affected by the global recession.
Table 1.1
Annual Volume of Exchange Traded Derivatives
U.S. Exchanges
2006 2007 2008 2009
Futures 2,043,926,142 2,644,564,674 2,852,549,470 2,328,114,528
% change 23.66% 29.39% 7.86% �18.38%
Options 2,529,362,212 3,446,445,874 4,101,501,346 3,987,096,642
% change 35.10% 36.26% 19.01% �2.79%
Total 4,573,288,354 6,091,010,548 6,954,050,816 6,315,211,170
% change 29.73% 33.19% 14.17% �9.19%
Non �U.S. Exchanges
2006 2007 2008 2009
Futures 3,250,147,029 4,573,164,803 5,465,149,620 5,850,991,617
% change 36.45% 40.71% 19.50% 7.06%
Options 4,050,032,383 4,862,456,753 5,259,576,767 5,533,829,312
% change �0.41% 20.06% 8.17% 5.21%
Total 7,300,179,412 9,435,621,556 10,724,726,387 11,384,820,929
27
% change 13.20% 29.25% 13.66% 6.15%
Global Total 2006 2,007 2008 2,009
Futures 5,294,073,171 7,217,729,477 8,317,699,090 8,179,106,145
% change 31.21% 36.34% 15.24% �1.67%
Options 6,579,394,595 8,308,902,627 9,361,078,113 9,520,925,954
% change 10.78% 26.29% 12.66% 1.71%
Total 11,873,467,766 15,526,632,104 17,678,777,203 17,700,032,099
% change 19.05% 30.77% 13.86% 0.12%
Source: http://futures industry.org
1.10 GLOBAL FUTURES AND OPTIONS VOLUME BY CATEGORY
Table 1.2
Global Futures and Options Volume By Category
(Based on the number of contracts traded and/or cleared at 70 exchanges worldwide)
2008 2009 % Change % of Whole
Equity Index 6,488,621,284 6,381,989,182 �1.6% 36.10%
Individual Equity 5,511,194,380 5,554,015,554 0.80% 31.40%
Currency 597,481,714 984,484,525 64.80% 5.60%
Agricultural 894,633,132 927,609,111 3.70% 5.20%
Energy 580,952,996 655,931,442 12.90% 3.70%
Non �Precious Metals 198,715,383 462,541,406 132.80% 2.60%
Precious Metals 157,443,026 151,260,666 �3.9% 0.90%
Other 44,896,671 114,436,271 154.90% 0.60%
Total 17,678,777,203 17,700,032,099 0.10% 100.00%
Source: http://futures industry.org
28
1.11 GLOBAL LISTED DERIVATIVES VOLUME BY REGION
Figure 1.2
Global Volumes in Percentage
Source: http://futures industry.org
The figure portrays the volume in percentage traded in different region. It could be
clearly understood that North America accounts for the largest volume of options
traded in the world closely followed by Asia.
Table 1.3 Top Derivatives Exchanges
Ranked by the number of futures and options contracts traded and/or cleared in 2009
Rank Exchange 2008-2009 2009-2010 % Change
1 Korea Exchange 2,865,482,319 3,102,891,777 8.30%
2 Eurex (includes ISE) 3,172,704,773 2,647,406,849 �16.6%
3 CME Group (includes CBOT and Nymex) 3,277,630,030 2,589,551,487 �21.0%
4 NYSE Euronex (includes all EU and US markets) 1,675,791,242 1,729,965,293 3.20%
5 Chicago Board Options Exchange (includes CFE) 1,194,516,467 1,135,920,178 �4.9%
6 BM&FBovespa 741,889,113 920,377,678 24.10%
7 National Stock Exchange of India 601,599,920 918,507,122 52.70%
Source: http://futures industry.org
29
1.12 INDIAN SCENARIO OF OPTIONS TRADING
The Indian scenario of options trading and the specifications put forward by the
Bombay Stock Exchange and the National Stock Exchange are explained in the
tables given below:
Table 1.4
BSE Contract Specifications
Contract
Specifications
Index Options Stock Options
Underlying
Asset SENSEX
Corresponding Stock in the
cash market
Contract
Multiplier/
Market Lot
100 times of SENSEX Stock Specific (Eg. Market lot
of Infosys is 100
Contract Month 1,2 and 3 months 1,2 and 3 months
Strike Price
Interval
50 SENSEX points. At any
time minimum 3 strikes
will be available i.e. 1 in-
the-money, 1 near-the
money and 1 out-of-the-
money
Shall have a minimum of 3
strikes i.e. 12 in-the-money, 1
near-the money and 1 out-of-
the-money
Premium
Quotation SENSEX points Rupees per share
Exercise Style European American
Tick Size 0.1 point (INR 10) 0.01
Price Quotations NA
30
Trading Hours 9.30 am to 3.30 pm 9.30 am to 3.30 pm
Settlement Style Cash
Settlement
Value
Closing value of SENSEX
on the settlement day
Closing value of the respective
stocks in the cash segment of
BSE
Exercise Notice
Time
It would be a specified time
(Exercise Session) on the
last trading day of the
contract. All in-the-money
options by certain specified
ticks would deemed to be
exercised on the day of
expiry unless the
participant communicates
otherwise in the manner
specified by the
Derivatives Segment
It is a specified time (Exercise
Session) everyday. All in-the-
money options would be
deemed to be exercised on the
day of expiry unless the
participant communicates
otherwise in the manner
specified by the Derivatives
Segment.
Last Trading/
Expiration Day
Last Thursday of the
contract month in case of
monthly & last Friday of
contract maturity in case of
weekly options. If it is a
holiday, then the
immediately preceding
business day. Note:
Business day is a day
during which the
Last Thursday of the contract
month in case of monthly &
last Friday of contract maturity
in case of weekly options. If it
is a holiday, then the
immediately preceding
business day during which the
underlying stock market is
open for trading.
31
underlying stock market is
open for trading.
Final Settlement
The final settlement of the
expiring option contracts
would be taken as the
closing value of the
underlying index. The
following algorithm is used
for calculating closing
value of the individual
stocks in the cash segment
of BSE including the
stocks constituting Sensex:
-Weighted Average price
of all the trades in the last
thirty minutes of the
continuous trading session.
-If there are no trades
during the last thirty
minutes, then the last
traded price in the
continuous trading session
would be taken as the
official closing price.
The final settlement of the
expiring option contracts
would be based on the closing
price of the underlying stock.
The following algorithm is
used for calculating closing
value of the individual stocks
in the cash segment of BSE
including the stocks
constituting Sensex:
-Weighted Average price of all
the trades in the last thirty
minutes of the continuous
trading session. -
If there are no trades during the
last thirty minutes, then the last
traded price in the continuous
trading session would be taken
as the official closing price.
Source: BSE Derivatives Contract Specifications, Bombay Stock Exchange,
Mumbai.
32
Table 1.5
NSE Contract Specifications
Contract
Specifications
Index Options Stock Options
Underlying Asset S&P CNX NIFTY Individual securities
Security descriptor N OPTIDX NIFTY N OPTSTK
Contract Size Permitted lot size shall be
200 and multiples thereof
(minimum value Rs. 2 lakhs
100 or multiples thereof
(minimum value of Rs. 2
lakhs)
Strike Price Interval Rs.20 Between Rs.2.5 and
Rs.100 depending on the
price of the underlying
Style of Option European American
Price Steps Re. 0.05 Re.0.05
Price Bands NA NA
Trading cycle The option contracts will
have a maximum of three
months trading cycle- the
near month (one), the next
month (two) and the far
month (three). New contract
will be introduced on the
next trading day following
the expiry of near month
contract
The option contracts will
have a maximum of three
months trading cycle- the
near month (one), the
next month (two) and the
far month (three). New
contract will be
introduced on the next
trading day following the
expiry of near month
contract
33
Expiry Day The last Thursday of the
expiry month or the previous
trading day if the last
Thursday is a trading
holiday
The last Thursday of the
expiry month or the
previous trading day if
the last Thursday is a
trading holiday
Settlement Basis Cash settlement onT+1 basis Daily settlement on T+1
basis and final option
exercise settlement on
T+3 basis
Daily Settlement
Price
Premium value (net). Premium value (net)
Final settlement
price
Closing value of the index
on the last trading day
Closing price of
underlying on exercise
day or expiry day. Last
trading day is the
settlement day
Source: NCFM Derivatives Core Module Work Book, National Stock Exchange Limited
The trading system has four categories of participants. The trading members are
permitted to trade their own or on behalf of their clients including the participants
and holds and ID allotted by the exchange. There are clearing members are
permitted to carry out risk management activities and confirmation/inquiry of
trades through the trading system. The professional clearing members like banks
and custodians are not trading members and they clear and settle for their trading
members. Finally, there are participants like financial institutions who trade
through multiple trading members and settles through the clearing members. The
clearing and settlement in NSE is undertaken by NSCCL (National Stock
Exchange Clearing Corporation Limited)
34
Chapter II
Research Methodology
35
2.1 TITLE OF THE STUDY
The title of the project is “Options Trading – Trends and Strategies and effect on
customers with respect to Geojit”.
2.2 RATIONALE OF THE PROJECT
High volatility associated with stock-market bottoms offers options traders
tremendous profit potential if the correct trading setups are deployed; however,
many traders are familiar with only option buying strategies, which unfortunately
do not work very well in an environment of high volatility. There are various
options trading strategies like Call back spread, Call ratio spread etc.
Hedging in financial terms is defined as entering transactions that will protect
against loss through a compensatory price movement. Hedging is the calculated
installation of protection and insurance into a portfolio in order to offset any
unfavorable moves.
2.3 OBJECTIVES OF THE STUDY
• To study the strategies in options trading adopted by Geojit.
• To examine the customer response to options trading strategies followed by
Geojit BNP Paribas Ltd.
• To examine the trend in options trading in Indian stock market.
2.4 TOOLS OF DATA COLLECTION
• A structured questionnaire is prepared for customers and the support staff
in futures and options section.
36
2.5 SAMPLING DESIGN
In statistics, a simple random sample is a subset of individuals chosen from a
larger set (a population). Each individual is chosen randomly and entirely by
chance, such that each individual has the same probability of being chosen at any
stage during the sampling process. For the study simple random sampling will be
made use of in order to collect data from the customers.
2.7 SAMPLING SIZE
For the survey 120 customers were taken in order to collect data. 80 out of the
customers were existing customers and the 40 were prospective customers.
2.8 DATA COLLECTION
• The primary data for the project were collected through questionnaires and
interview of the officials working in the futures and options department.
• For secondary data the company’s reports, published journals and monthly
reports were relied upon for data support.
2.9 DATA ANALYSIS
The quantitative analysis was done with the help of MS-Excel and SPSS
commands like Cross Tab, correlation.
2.10 LIMITATIONS OF THE STUDY
• Sample size of the study is very small.
• Time is yet another constraint in the study.
Reluctance on the part of customers to reveal information and provide data is a
constraint which has affected the study.
37
Chapter III
Profiles
38
39
3.1 PROFILE OF THE INDUSTRY
The Indian capital markets have witnessed a transformation over the last decade.
India is now placed among the mature markets of the world. Today, financial
markets are turbulent, globally. The most precious word today is the
“convergence” of the opportunity zones in financial markets from concept to
culmination. It may be observed that the competitive dynamics of market has
changed phenomenally.
The Indian stock market is an organized one, structured and controlled by various
governing bodies. The financial services include the banking sector, insurance,
mutual funds, NBFCs (Non Banking Financial Corporation), the share trading
brokers, Foreign Institutional Investors (FII), Foreign Direct Investors and the like.
The industry is governed by the Reserve Bank of India, Insurance Regulatory and
Development Authority, Securities Exchange Board of India, Forwards Market
Commission and other apex institutions.
The average assets under management of the mutual fund industry stood at US$
174.06 billion for the month of February 2010, an increase of nearly 36 per cent
from US$ 111.55 billion in February 2009, according to the data released by
Association of Mutual Funds in India (AMFI). India's market capitalization (m-
cap) touched US$ 1.04 trillion in June 2009 making it the ninth largest in the
world. In 2009, there were 21 IPOs that raised US$ 4.25 billion as compared to 36
IPOs in 2008 that raised US$ 3.68 billion. (Source: Http://futures industry.org)
Moreover, on the back of an increase in the participation of agriculture and other
commodities, the 23 commodity exchanges posted 50 per cent year-on-year
growth in turnover in the April-February period 2009-2010, to touch US$ 1.53
trillion, according to the commodity markets regulator, Forward Markets
Commission (FMC).
40
According to data collated by international stock market research firm Bespoke
Investment Group; India has the best PEG multiple (price earnings-to-growth)
amongst several emerging and developed markets. At over 26 times trailing P/E
multiple and an estimated 2010 GDP growth rate of 8 per cent, India (denoted
using Sensex) commands a rather comfortable PEG multiple of 3.27 times.
Technology is also helping market players redefine the way they have been
operating in the market.
The economy is expected to grow over 8% and widely recognized as one of the
stable and consistently growing investment destinations in the world. India has
inherent strengths in terms of domestic demand, skilled manpower and reliable
regulatory policies which have been widely acclaimed. This will certainly result in
a positive re-rating of the country's investment attractiveness. The recent events in
Greece, Spain and elsewhere in Europe had brought in reduced risk appetite and
reverse investment flow from the markets. The global environment and linkages
are likely to affect markets also, increasing the volatility of the markets. It is a
matter of concern that the retail investor population in the country is not growing
at a desirable rate as a result of high volatility. Regulatory changes in the fee
structure of distribution business are also a matter of concern. Consistent and high
economic growth directly affects corporate results. Also the demand for
products/services and capital investments will eventually make India an attractive
investment destination.
41
3.2 PROFILE OF GEOJIT BNP PARIBAS FINANCIAL SERVICES
LTD.
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 was renamed as
Geojit BNP Paribas Financial Services Ltd.
BNP Paribas is the Eurozone’ 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 value. Furthermore, it is one of the 6 strongest banks in the
42
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 is a global-
scale European leader in financial services. It holds key positions in its three
activities: Retail banking, Investment Solutions and Corporate & Investment
Banking. BNP Paribas has been operating in India since 1860.
Geojit BNP Paribas today is a leading retail financial services company in India
with a growing presence in the Middle East. The company rides on its rich
experience in the capital market to offer its clients a wide portfolio of savings and
investment solutions. The gamut of value-added products and services offered
ranges from equities and derivatives to Mutual Funds, Life & General Insurance
and third party Fixed Deposits. The needs of over 460000 clients are met via multi
channel services - a countrywide network of 500 offices, phone service, dedicated
Customer Care centre and the Internet. Geojit BNP Paribas has membership in,
and is listed on, the National Stock Exchange (NSE) and the Bombay Stock
Exchange (BSE).
Table 3.1 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. Martin Zachmeier Director (Planning and Control)
Mr. Binoy .V.Samuel Chief Financial Officer
Mrs. Jaya Jacob Alexander Chief of Human Resources
43
Table 3.2 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
Mr. Pierre Rousseau Non - Executive Director
Company and Future plans
The company will issue 1,12,00,000 shares to employees of the Company and
subsidiaries under Employee Stock Option Plan 2010 (ESOP 2010) at such time
and in accordance with such terms and conditions as the Board/Compensation
Committee may prescribe.
Joint ventures
i. Barjeel Geojit Securities, Dubai
Barjeel Geojit continues to do well. The Company performed commendably in
both the Indian equity business, and mutual funds and insurance distribution
among NRIs in the UAE and Oman. This 30% joint venture recorded a net profit
of Rs.7.46 core, an increase of 64% over the last year. The mutual fund assets
under management handled by Barjeel Geojit increased by 69% to Rs.959 crore.
Total assets under management including equities as on 31.03.2010 is Rs.1,836
crore.
44
ii. Aloula Geojit Brokerage Company, Saudi Arabia
This 28% Joint Venture is now well positioned as a complete financial advisory
and investment solutions provider in Saudi Arabia following approval of
additional licenses for Underwriting, Asset Management, Advisory and Custody
Service in the Securities Business by the Capital Market Authority during the year.
The new licenses will allow Aloula Geojit to facilitate/advise its clients including
NRIs to be able to deal in international markets including Indian market. Saudi
Capital Market is yet to show an improvement like other world markets and
therefore revenues for the joint venture is yet to pick up. The Company incurred a
loss of Rs.11.19 crore during the year, out of which the company’s share is
Rs.3.13 crore.
iii. BNP Paribas Securities India, Mumbai
This 50% Joint Venture with BNP Paribas for institutional business improved its
revenue significantly. The current year revenue was Rs.39.31 crore higher by
146% over the previous year. On account of the inherently high cost nature of
institutional business, the Company is yet to reach the break even level. The
Company incurred a loss of Rs.14.84crore during the year, out of which the
company’s share is Rs.7.42 crore. Presently the Company has a research team
which covers 95 stocks with market capitalisation of 72 billion dollars, comprising
56% of the total NSE market capitalisation. There has been an increase in the
number of domestic and foreign institutional clients also. It is expected that the
joint venture will generate higher revenues and market share in future.
45
Business Tie-ups
Partnership with South Indian Bank and City Union Bank has been executed in
January2010 to provide online trading facility for bank's retail clients. The
Company has already tied up with Axis Bank and Federal Bank on similar lines.
The Company has also partnered with Federal Bank for offering Portfolio
Investment Scheme for NRIs during the year.
3.3 PRODUCT PROFILE:
The company is the pioneer in providing online services to customers. The
company started. This was followed by integrating the first Bank Payment
Gateway in the country or Internet Trading, and many other industry firsts. Riding
on this experience, and harnessing BNP Paribas Personal Investors’ expertise as
the leading online broker in Europe, is helping the company to rapidly expanding
its business in this segment. 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, enables the respective bank’s clients to open
integrated 3-in-1 accounts to seamlessly trade via a sophisticated Online Trading
platform.
Certified financial advisors help clients to arrive at the right financial solution to
meet their individual needs. The wide range of products and services on offer
includes –
o Equities
o Derivatives
o Currency Futures
o Custody Accounts
o Mutual Funds
46
o Life Insurance & General Insurance
o IPOs
o Portfolio Management Services
o Property Services
o Margin Funding
o Loans against Shares
Geojit BNP Paribas gives the option to choose from the 700 plus Mutual Fund
schemes offered by over 35 Asset Management companies such as SBI Mutual
Fund, Reliance Mutual Fund, Franklin Templeton India Mutual Fund, Tata Mutual
Fund, Sundaram BNP Paribas Mutual Fund, Fidelity Mutual Fund, and HDFC
Mutual Fund. The company has also launched exclusive branches for women.
Review of operations
The various activities of the Company showed significant improvement in revenue
and profits during the year.
a) Brokerage services
Brokerage activity saw an increase in number of active clients and volumes
compared to the previous year. The improvement in market conditions enabled the
Company to realise the benefits from the geographical expansion and
technological up gradation undertaken earlier. The Company added 12 outlets
during the year and has a total of 508 outlets. During the year, the Company
launched a newly developed online investment and trading platform called 'Flip'.
The Company expects to enhance its internet trading business with this new multi-
featured platform. Currency futures trading which was launched in October2008
picked up volumes and revenues during the year.
47
Brokerage from equity and derivatives continued to be the main source of income
of the Company and contributed 76% of the consolidated revenue during this
financial year. The Company earned brokerage revenue of Rs.231.98 crore from
capital market activities, an increase of 91% from the previous year. The total
traded volume showed an increase of 80%in the cash segment and 50% in the F &
O segment. The number of broking clients increased 16% during the year.
Brokerage revenue from internet trading grew by 111%.
b) Depository services
Number of depository accounts increased to 3.21 lakh at the end of the year and
the income from this activity increased by 35% to Rs.10.06 crore. The value of
assets under custody increased by 98% to Rs.8878 crore. 33,000 accounts were
added which represents1.69% of the increase in the active depository accounts in
NSDL and CDSL during the year. A total of 19.57 lakh active accounts were
added in both the depositories during the year, which may not be unique accounts
as clients are permitted to open depository accounts with more than one depository
participant.
c) Distribution of financial products
Revenue from distribution of mutual funds was adversely affected due to changes
in the commission payment structure during the middle of the year. The Company
is strengthening its advisory capabilities aiming to improve and standardise the
advisory skills of the employees. The management expects that this effort will
yield results in the years to come. The insurance agency of Met life continues to
do satisfactorily. However, if there are any changes in the fee structure of ULIP
policies resulting from the ongoing debate, there will be an impact resulting from
such changes. The Company has earned a total income ofRs.9.62 Crore from
distribution business during the year which was lower by 19%.
48
d) Portfolio Management Services
The portfolio management services of the Company performed very well by
providing returns much better than the benchmark returns during the year under
review. On a trailing12 month basis, till the date of this Report, the portfolio
increased by 124.92 % vis-à-vis 53.97 % increase in Sensex, and CNX Nifty
increase of 51.97 percent. There was an improvement in the assets under
management and the fees improved by 38% compared to previous year. The
Company has aggressive plans to grow the Portfolio Management Services among
high net worth resident individuals as well as non residents.
e) Financing
The financing activities in the form of margin funding showed increased revenues
corresponding to market activities. However, there is a fall in the revenues of
NBFC subsidiary on account of lower loan against shares and loan against
commodities. Total income from financing was Rs.4.01 crore.
f) IT Service and products
Geojit Technologies, the subsidiary engaged in IT development and services
achieved CMMI Level 3 certification during the year, which is recognition of the
Company's sustained commitment to deliver quality products and services to its
clients. Apart from servicing group companies, the company was able to generate
revenues from other customers and also received export orders during the year.
The Company generated consolidated revenue of Rs.11.24 crore, an increase of
69% over the previous year and a net profit ofRs.4.67 crore, an increase of 135%.
The future prospects for this division look bright as the team is continuing to get
export orders.
49
Value added services
During the year certain regulatory changes happened which enabled us to provide
value added services to clients. SEBI has allowed the Stock Exchanges to trade in
mutual funds. The Company has launched online investments in mutual funds
through National Stock Exchange of India's Mutual Funds Service System
(MFSS). IRDA has allowed life insurers to sell insurance online. The Company
has partnered with Royal Sundaram Alliance Insurance Company to distribute all
their personal lines General Insurance products and to issue policies online from
our offices.
50
Chapter IV
Data Analysis and Interpretation
51
Primary Data Analysis
In order to analyze the customer’s response to options trading and to examine the
level of understanding of the customers regarding options trading a questionnaire
was prepared and distributed among 120 customers. The data so obtained has been
analyzed below:
4.1 Years of Trading Experience
The years of trading experience of the customers with Geojit has been depicted in
the chart given below:
Figure 4.1
Years of Trading Experience
7% 4%11%
53%
25% Less than 6 months
6 months to 1 year
1 year to 3 years
3 years to 5 years
5 years or more
Interpretation:
It can be interpreted that maximum number of customers has been trading for
more than 3 years and within 5 years. It can be analyzed that the company has
52
more retention of customers than new customers opening trading accounts. The
number of customers in the branch is around 200 of which most of the customers
are trading in equities rather than derivatives and options.
4.2 Level of Satisfaction
The following chart shows the level of satisfaction of customers with Geojit. Most
of the customers are satisfied with the company, the majority being highly and
somewhat satisfied followed by neutrally satisfied. The second chart shows the
recommendation made by the customers to other acquaintances which also shows
the level of satisfaction of customers.
Figure 4.2
Level of Satisfaction
Level of Satisfaction
25%
43%
11%
21%0%
Highly Satisf ied
Somew hat satisf ied
Neutral
Somew hat dissatisf ied
Highly Dissatif ied
53
Figure 4.3
Recommendation To Prospective Customers And Acquaintances
22.22222222
59.25925926
18.51851852
0
10
20
30
40
50
60
No NeverRecommended
Have RecomendedOnceor Twice
Have RecommendedSeveral Times
Interpretation:
From figure 4.2, the level of customer satisfaction with the company and its services can
be inferred. The graph clearly suggests that the majority of the customers are happy with
the services provided by the company. 43% of the respondents are somewhat satisfied
with the services of the company, where ascot a single customer is dissatisfied with the
services of the same.
The figure 4.3 also provides an insight as to whether the customers advocate the company
to their friends and acquaintances. This clearly shows two things- the level of satisfaction
and the scope for further account openings in the firm.
54
4.3 Investment Decisions of the Investors
The investment decisions of the customers are based on the risk perception and
return portfolio.
Figure 4.4
Portfolio and Investment Decisions of the Investors
0
5
10
15
20
25
30
equity MutualFunds
IPO Futures PMS Options Insurance
Stock Traded By customers
Series1
Interpretation:
From figure 4.4, it can be analyzed that the majority of the customers are trading in
equity stock. The introduction of options was to reduce the risk associated with the stock
trading. But from the responses elicited from the customers it can be analyzed that the
investors are still to understand the importance of options trading.
The reason for low trading in options could be due to lack of awareness among the
investors regarding the benefits of stock options. As far as the Geojit BNP Paribas
55
Financial Services Ltd Bangalore main branch is concerned only 8 out of the 200
odd customers are actively trading in options.
It should also be noted that although options was introduced to reduce the risk, the
complexities associated with options trading bars the investors from entering the
options trading field.
4.4 Risk Management and Risk Preference of Customers:
Figure 4.5
Risk Perception of Customers
Risk in Portfolio
0 2 4 6 8 10 12 14
Low Risk/ Low Return
Low Risk / Low return to moderate return
Moderate risk / moderate return
Moderate to high risk/ moderate tohighreturn
High Risk / High Return
Series1
56
Interpretation:
The above figure represents the risk perception of the employees regarding options
trading. Of the respondents who answered the question of risk perception, 12
customers believe that they would go in for moderate risk with moderate return
portfolio. At the same time only 5 customers would go an extra step to earn a high
return taking a high risk portfolio.
The chart can be analyzed and the following observations can be obtained:
o The customers are interested in taking calculated risk and in obtaining an
assured rate of income.
o There are risk venturing customers, who would prefer high risk high return
portfolio also.
o Since customers prefer moderate risk moderate return portfolio, the scope
for options trading is vast as the customers can obtain high returns at
moderate risks.
This would further advocate that the investors have the option of playing safe.
Hence there is ample scope for options trading as the trading in options is aimed at
risk reduction and maximizing returns.
The awareness of the options trading strategies put forward by the NSE is
virtually nil and this could be one reason why customers tend to purchase equity
and prefer not to trade in options.
4.5 Trading in Options
The customers trading in options were asked about the type of options they trade
in. The charts given below give an insight as to the trading in American Options
57
and European Options as well as trading in the index option as well as stock
options segment.
Figure 4.6
Options Trading in American and European Options
American Options
European Options
S1
75%
25%
0%10%20%30%
40%50%60%
70%80%
Series1
58
Figure 4.7
Options Trading in Index and Stock Options
Trading in Options
80%
20%
Index Opt ions
Stock Opt ions
Interpretation:
The number of customers, trading in stock options are more as compared to the
index options. The customers trading in American options are more. The reason
behind this is that in India most of the options are American options.
The index options in India have a European settlement method and hence the
graph depicts more number of customers in the American options segment.
4.6 Awareness on Strategies
The awareness of the customers regarding the options trading strategies is depicted
in the figure given below:
59
Figure 4.8(a)
Awareness on Options Trading Strategies
13%
87%
Aware about the strategies
Not Aw are
Figure 4.8(b)
Awareness of Customers in Each Strategy
105 4
2011
30
128
051015202530
Customers no. in %
Short call butterfly
Long call butterfly
Long straddle
Bear put spread
strategy
Bull call spread
strategy
Bull put spread
strategy
Bear call spread
strategy Collar
Strategies
60
Interpretation:
The awareness among the customers regarding the options trading strategies have
been depicted in the above graph. The majority of customers were not aware of the
strategies put forth by the NSE in its options trading module. Of the customers
who are aware of the strategies, the percentage of the same is depicted above.
Only 13 % of the customers are aware of the options trading strategies. Out of that
13%, 30% of the customers are aware of the Bull put spread strategy and 20% are
aware of Bear put spread strategy. This requires that the company should work on
improving the knowledge of its customers regarding options trading and thereby
increase the volume of options trading.
4.7 Reasons for Trading in Options:
Figure 4.9
Reasons for trading in Options
Reasons for Options Trading
34%
36%
0%1%
20%
9%
Reduction in Risk
Returns
Leverage
Availability
Volatility
Aw areness
61
Interpretation
Figure above represents the factors affecting customers’ choice of options trading
as against trading on equity. The return is the reason why most of the customers
have turned to options trading. The advantage of hedging is also yet another
reason for the customers picking options as an investment opportunity. The
customers in Geojit who trade in options are mostly the retired class and hence
they expect risk free consistent income. The risk in options trading is limited to the
premium amount of the option. Hence that is also yet another factor which affects
options trading.
4.8 Effectiveness of the Company
The following graph represents the effectiveness of the company in
implementation of options trading strategies.
Figure 4.10
Effectiveness of Geojit BNP Paribas Financial Services Ltd. in
Implementation of Options Trading
Yes to anExtent Somew hat
successful Don’t think ithas beeneffective
S105101520253035404550
No. Of Customers
Responses
Effectiveness of Geojit in implementing Strategies
62
Interpretation:
It can be understood from the graph that almost 40 to 45 % of the customers
believe that the company has been effective in implementation of the options
trading strategies. The customers have admitted that the dealers who assist the
investors in trading in options have always gone an extra mile in giving advice to
the customers regarding the various profitable opportunities in options trading.
4.9 Education Level and Options Trading
The following table shows the educational qualification of the customers of the
options trading segment.
Table 4.1
Education Level of Customers
Educational Qualification No. Of Customers (in
%) Under Graduate 20
Graduate- Arts, Science and Commerce Stream 60 Graduate - Professional Stream 17 Post Graduate 3
The majority of the Geojit Bangalore branch customers are graduates trading in
options.
63
4.10 Income level and Options Trading
Figure 4.11
Income Level and Options Trading
2
25
61
12
0
10
20
30
40
50
60
70
Number of Customers
>100000 100000-300000
300000-500000
<500000
Income
Series1
Interpretation:
From the figure above it can be inferred that almost 70% of the customers that
trade in options are coming under the income group of Rs. 300000 to Rs.500000.
4.11 Brokerage of Geojit in the Options Trading Segment:
The brokerage varies as per the volume traded by the customers. The following
table represents the brokerage charged by Geojit With regards to the derivatives
trading:
64
Table 4.2
Brokerage of Geojit with Regard to Derivatives
Normally the company charges a brokerage of Rs.75 per lot of the options traded.
But in case of high volumes, the brokerage will be pulled down to as low as Rs.30.
The brokerage charged by Geojit can influence customers to trade more volumes
in the options market. This is so because as the volume of trading is increased the
brokerage is reduced. This can help in encouraging the customers to increase the
volume traded.
Secondary Data Analysis
Performance of F& O Segment
In the following analysis, the performance of F&O Segment of BSE and NSE
based on monthly turnover data downloaded from the database of Reserve bank of
India have been examined. The figures from BSE and NSE have been taken and
worked out with ANOVA to measure the impact of F&O Turnover on the Capital
Market Turnover in both the exchanges. The following figures give a graphical
presentation of monthly turnover of F&O in both NSE and BSE.
65
Figure 4.12
Turnover of Index Futures and Options in BSE
Source : BSE Website
The chart indicates large turnover in respect of index futures compared to stock
futures. Besides the stock futures show sharp decline, almost nil trading after
April.
Figure 4.13
Turnover of Stock Futures and Options in BSE
Source : BSE Website
66
The stock options show meager turnover while the stock futures show a higher
turnover.
Figure 4.14
NSE Index Futures and Options
Source : BSE Website
The futures and options turnover in NSE during the initial period is found to be
very low compared to that in BSE. But the turnover picked up from September
and went above the turnover of BSE. The turnover in the case of options is lower
than that for futures.
67
Figure 4.15 NSE Stock Futures and Options
Source : NSE Website
The stock futures show a higher turnover than options. The option turnover show
almost steady pattern. The stock futures reached the peak level in May and then
started declining.
Figure 4.16
Aggregate Turnover In Future and Options Segment
Source : BSE Website
68
The aggregate turnover of F&O segment taking the trading in both NSE and BSE
together shows that the futures trading turnover and aggregate F&O turnover show
the same trend indicating that futures constituted the major and deciding
component in F&O segment operations. Having studied the level of significance
of F&O segment in the capital market turnover, in both BSE and NSE by
calculating Karl Pearson's Coefficient of Correlation and Linear Regression the
following have been observed.
Table 4.3
Correlations - BSE Capital Market Turnover with BSE F&O Turnover
F&O Capital Market
F&O Total Turnover Pearson Correlation 1.000 .009
Sig. (2-tailed) . .943
N 64 64
Capital Market
Turnover
Pearson Correlation .009 1.000
Sig. (2-tailed) .943 .
N 64 64
Table 4.4
Regression- Model Summary- BSE Turnover & Capital Market Turnover
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .009 .000 -.016 783626.9853
A Predictors: (Constant), VAR00001
69
Table 4.5
ANOVA- BSE Turnover & Capital Market Turnover
Model Sum of Squares Df Mean Square F Sig.
1 Regression 3121239320.938 1 3121239320.938 .005 .943
Residual 38072417631485.950 62 614071252120.741
Total 38075538870806.880 63
a Predictors: (Constant), F&O Turnover
b Dependent Variable: Capital Market Turnover
Table 4.6
Coefficients - BSE Turnover & Capital Market Turnover
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
Model B Std. Error Beta
1 (Constant) 1251478.656 107944.017 11.594 .000
F&O 6.347 89.020 .009 .071 .943
a Dependent Variable: Capital Market Turnovers
The above analysis clearly indicates that the F&O turnover in BSE is quite
insignificant and does not have any impact on the capital market turnover.
70
Table 4. 7
Correlations - NSE Capital Market Turnover with BSE F&O Turnover
F&O Capital market
F& O Total
Turnover
Pearson Correlation 1.000 .966
Sig. (2-tailed) . .000
N 64 64
Capital Market
Turnover
Pearson Correlation .966 1.000
Sig. (2-tailed) .000 .
N 64 64
** Correlation is significant at the 0.01 level (2-tailed).
Table 4.8
ANOVA - NSE Capital Market Turnover with BSE F&O Turnover
Model Sum of Squares Df Mean Square F Sig.
1 Regression 105162156015.535 1 105162156015.535 854.422 .000
Residual 7630951813.795 62 123079867.964
Total 112793107829.330 63
a Predictors: (Constant), F&O Turnover
b Dependent Variable: Capital market Turnover
71
Table 4.9
Coefficients - NSE Capital Market Turnover with BSE F&O Turnover
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
Model B Std.
Error
Beta
1 (Constant) 46385.076 1971.295 23.530 .000
F&O .209 .007 .966 29.230 .000
a Dependent Variable: Market Turnover
The analysis indicates significant correlation between NSE F&O segment turnover
and capital market turnover. It also indicates a high correlation between the capital
market turnover and F&O segment in NSE.
72
Chapter V
Findings and Conclusions
73
5.1 FINDINGS
The following findings have been incurred from the study:
o The volume in options trading is really high. But the number of customers
dealing in options is really low. This can be understood from the simple
fact that only 4 % of the customers in the Bangalore branch are trading in
options; at the same time the branch has got high revenues from the F& O
section as well. The lack of awareness in the strategies is the reasons for the
low number of customers in options segment.
o Customer’s awareness about the options trading is low. The customers are
not aware of the advantages of options like hedging, reduction in risk and
limiting the risk to the premium amount and the unlimited opportunity of
getting profits.
o The company is charging a brokerage of Rs.75 per lot. It may be lowered as
low as to Rs. 30 when the volumes exceed Rs.36 Crore. This has
encouraged the existing customers to trade more volumes.
o The strategies of options trading help in getting a better position on the
trading front. The awareness of the Geojit customers in this respect is as
low as 13%.
o The customers, who trade in options, are basically of the income group of
Rs.300000 to Rs.500000. Only 12% of the customers have income level
above Rs.500000.
5.2 CONCLUSIONS
It can be seen from the study that the options trading segment is much untouched
segment by most investors as it requires market knowledge and hence there is
great scope for the company to increase their options trading volume.
74
Chapter VI
Suggestions and Recommendations
75
6.1 SUGGESTIONS AND RECOMMENDATIONS
The following recommendations can be helpful in getting more customers to
respond to the strategies:
o Awareness among customers regarding the options trading strategies can be
done by:
o Sending Newsletters to customers regarding the options trading
o Include more of the Options Trading news in Geodata, the
monthly journal of Geojit so that customers can be made aware.
o Including details of options trading strategies in the Geodata.
o The company should give training programmes to its customers
about options and the strategies for successful options trading .
o The company should focus on the existing customer base. As
Geojit is a well established company, the customer base is wide.
The existing customers mainly trade in equity (cash market) and
the mutual fund schemes. By evaluating the existing customers,
their reasons for not trading in the options segment can be done.
Creating awareness among the existing customers and motivating
them to trade in options can also be an effective method to get
more customers to options trading.
o The company can also go in for online forum creation for
customers where dealers and other employees form part of the
same. This can enable better exchange of ideas.
o The volume is increasing in the options segment but the number of
customers trading is not as high as that of equities or other securities. This
opens up an opportunity for the company to tap the customers in options
segment.
76
o The company needs to bring about new marketing strategies in order to
promote options trading. The company was successful in its efforts to bring
new customers by providing free DEMAT and trading account opening and
zero Annual Maintenance Charges for the first year. The company should
bring out schemes for options trading like reduced brokerage, waiver of
o Annual Maintenance charges for those customers who trade in options
above a stated volume. The company can also give credit facility for the
customers in payment of brokerage and other payments due to the company.
o The company should also take up advertising activities for its futures and
options segment. Geojit does not at present individually advertise for each of
its product class. Hence they need to come up with advertisements which
advocate the advantages of options trading
o The company may also promote online trading, by way of which the
customers may get into options trading. This is so because options trading
requires constant market watch and hence is difficult to do offline. The
working class can be benefited out of online trading and hence can attract
more customers to options trading.
o The education level of the customers in options trading segment is
confined to graduate level. This is an added advantage for the company as the
company can easily educate the customers on options trading, its strategies and
advantages.
77
BIBLIOGRAPHY
Books
• Allaire, Marc J, Options essential concept and trading strategies, 2nd edition.
Richard Irwin & Co, 1995.
• Khan, M Y., and P K Jain. Financial Management. Tata- McGraw Hill, 2008.
Web sites reference
o http://news.moneycontrol.com , July 3, 2010
o http://www.investopedia.com July 11, 2010
o https://gcc.geojit.net/geodata_index.asp , July, August, September, 2010.
o www.nseindia.com, September 2010
o www.bseindia.com, September 2010
78
Appendix
79
Questionnaire
Analysis of Customer Satisfaction and Options Trading
Strategies.
Dear Sir / Madam,
I am Mrinalini Shankar, a PGDM student of SCMS Cochin. I am conducting a
survey on customer satisfaction and options trading strategies of Geojit BNP
Paribas Financial Services Ltd. Kindly cooperate with the same and please provide
relevant data for the successful completion of survey. I also assure that the details
provided will be kept confidential and used for academic purpose only.
1. Name of the customer :
2. Gender : Male Female
3. Age :
18 – 24 25 – 34 35 – 44 45 – 54 55 – 64 65 or older
4. Highest Educational Qualification:
(Please mention)
5. Occupation and annual income
(Please mention) :
6. How long have you been trading with Geojit BNP Paribas Financial
Services Ltd.?
80
Less than 6 months 6 months to less than 1 year
1 year to less than 3 years 3 years to less than 5 years
5 years or more Not yet trading with Geojit
7. How would you rate your overall level of satisfaction with Geojit BNP
Paribas Financial Services Ltd.?
Highly satisfied Somewhat satisfied
Neutral Somewhat dissatisfied
Highly dissatisfied
8. Rank the following as per your expectation from a financial service
provider?
(0 to 10)
a) Regular feedback b) Transparent dealing
c) No hidden cost/charges d) Customized offers
e) Low Brokerage/commission f) High quality services
g) Goodwill h) No. of branches in locality
i) Any other (Please specify)………………
9. How often do you use our services?
Don't Use Daily Weekly Monthly Quarterly
Online trading
Offline Trading
Flip software
10.Which are the various products that you trade in? Please check which ever
applies.
Equity Mutual Funds
IPO Futures
PMS Options
Others Specify ……………….
81
11. If you are trading in options, what are the reasons for trading in options?
Kindly rank those from 1 to 6 based on priority, 1 being the highest priority
and 6 the lowest.
Risk Factor
Returns
Availability
Volatility
Leverage Awareness
12.Which of the following portfolios would you like to invest in. [NPlease tick]
a) Low risk / Low return portfolio
b) Low to Mod risk / Low to Mod return portfolio
c) Moderate risk / Moderate return portfolio
d) Mod to high risk / Mod to high return portfolio
e) High risk / High return portfolio
13.Are you aware of the options trading strategies put forward National
Stock Exchange, incase you deal in options trading?
Yes No
14. What are the strategies you think Geojit BNP Paribas Financial Services
Ltd. is adopting in options trading? ( Please tick whichever applies )
Short call butterfly Long straddle
Long call butterfly Collar
Bear call spread strategy Bear put spread strategy
Long call condor Bull call spread strategy
Short call condor Bull put spread strategy
15. Do you think Geojit has been effective in implementing these strategies?
Yes, to a great extent
Somewhat successful
Don’t think it has been effective
16. If you are undertaking options trading, which type of options do you trade
in?
82
Choose one : Index Option Stock Option
Choose one : American options European options
17. Have you ever felt difficulty in choosing the right underlying stock for
options trading?
Never
Once or twice
Yes always
18. Which asset classes do you make use of in trading?
Equity (including Mutual Funds) Gold
Real Estate Fixed deposits
Insurance Government Bond
NSC/KVP PPF
19. Have you ever recommended us to others?
No, never recommended
Have recommended once or twice
Have recommended several times
If Yes, please mention reason
…………………………………………………………....…………………………
If No, Why?
…………………………..…………………………………………………………
Thank You