summer internship report finideas

Portfolio Management

Summer Internship Report 2013

Submitted To:

Dr. Dhaval Maheta

Submitted by:

Jigar S. PatelM.B.A Semester 3[Full Time]

The Department of Business and Industrial ManagementVeer Narmad South Gujarat University

New Citylight Canal Road,Opp. G.D.Goenka International School, Surat.


Certificate

This is to certify that Mr. Jigar S.Patel {MBA Semester 3}has successfully completed his Summer Internship under our guidance during the span of 7th

May 2013 to 6th July 2013.

The Department of Business and Industrial ManagementVeer Narmad South Gujarat University

New Citylight Canal Road,Opp. G.D.Goenka International School, Surat.

Head of Department: Research Guide:Dr. Renuka Garg Dr. Dhaval Maheta

Date:April 17, 2023

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Acknowledgement

The Researcher is very thankful to all that have helped him and for providing their valuable time and guidance. He owes deep gratitude to a number of people who have guided, inspired and motivated him. So he takes this opportunity to thank all of them. It has given the researcher hands on experience, which he could not have gained from reading. The researcher is thankful to the FinIdeas team which has provided him this golden opportunity of preparing the project report, which provides the practical knowledge about market and industry.

The Researcher is very thankful to the Directors of FinIdeas, C.A. Govind Jhawar and C.A. Udipth Talera for their continued guidance in Software Architecture and Education in Option Derivatives.

The Researcher is thankful to V.P Education Mr. Yogesh Darji who has provided him with valuable education for the derivatives market, the Call and Put Options, and the Greeks.

The Researcher is also thankful to the employees of FinIdeas who have provided him with the time and knowledge to fill him with knowledge of their respective departmental activities inspite of their strict schedules.

The Researcher is very grateful to his guide Dr. Dhaval Maheta. The researcher is thankful to his family members for supporting him to complete the research and being a source of inspiration for him.

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Dedicated To

The Researcher dedicates the report to the Goddess of Knowledge Mother Saraswati and the Omnipotent, Omniscient and Omnipresent Masters of knowledge who have established the roots of all Universities and are responsible for the flow of knowledge in the universe.

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Submitted to

The Researcher humbly submits this report to Dr. Dhaval Maheta without his sheer Guidance and directions the completion of the same would not have been possible.

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Chapter Index

Table of ContentsCertificate..................................................................................................................................2Acknowledgement.....................................................................................................................3Dedicated To..............................................................................................................................4Submitted to...............................................................................................................................5Chapter Index.............................................................................................................................6Index of Illustrations..................................................................................................................9Introducing FinIdeas................................................................................................................10

The Company.......................................................................................................................10

Board of Directors...........................................................................................................10

Foundation of Company..................................................................................................10

Education Segment..........................................................................................................11

Software Segment............................................................................................................11

Departments within FinIdeas...............................................................................................12

Software Department.......................................................................................................13

Education Department.....................................................................................................15

Trading Department.........................................................................................................16

Portfolio Basics........................................................................................................................17Investments..........................................................................................................................17

Examples of Investment......................................................................................................18

Portfolio...................................................................................................................................19Portfolio Design.......................................................................................................................20

Types of portfolio:...............................................................................................................20

Random portfolio.................................................................................................................20

Features of random portfolio...........................................................................................20

Advantages of random portfolio......................................................................................21

Disadvantages of random portfolio.................................................................................21

Sector specific portfolio.......................................................................................................21

Features of sector portfolio..............................................................................................21

Advantages of sector portfolio.........................................................................................21

Disadvantages of sector portfolio....................................................................................22

P/B Ratio..................................................................................................................................22

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P/E ratio...................................................................................................................................22Beta Factor...............................................................................................................................23

Interpretation of Beta...........................................................................................................23

Interpretation of Random Portfolio.....................................................................................24

Derivatives Market..................................................................................................................25Meaning of Derivatives.......................................................................................................25

Forward................................................................................................................................26

Futures.................................................................................................................................26

Options.................................................................................................................................26

Types of Options..................................................................................................................27

Call Options.....................................................................................................................27

Put Options......................................................................................................................27

Swaps...............................................................................................................................27

InterestRateSwaps............................................................................................................27

CurrencySwaps................................................................................................................27

Type of Options - ITM, ATM & OTM................................................................................28

ITM..................................................................................................................................28

ATM................................................................................................................................28

OTM................................................................................................................................28

Type of Option - American / European...........................................................................28

Option Terminology............................................................................................................29

Spot Price.........................................................................................................................29

Strike Price.......................................................................................................................29

Intrinsic Value.................................................................................................................29

Time Value......................................................................................................................29

Maturity Date...................................................................................................................29

Premium...........................................................................................................................30

Exercise and Assignment.................................................................................................30

Call Option...............................................................................................................................31Benefit of Call Option.........................................................................................................32

Put Option................................................................................................................................34Benefit of Put Option...........................................................................................................35

Synthetic Options.....................................................................................................................36What is Synthetic Call Option.............................................................................................36

What is Synthetic Put Option..............................................................................................37

What is Synthetic Future.....................................................................................................38

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Option Strategies.....................................................................................................................39Bearish Strategies................................................................................................................40

Range Bound Strategies.......................................................................................................45

Option Pricing..........................................................................................................................47Intrinsic Value:....................................................................................................................47

Time Value:.........................................................................................................................48

Option Greeks..........................................................................................................................49Meaning of Delta.................................................................................................................49

Meaning of Gamma.............................................................................................................50

Meaning of Vega.................................................................................................................50

Meaning of Theta.................................................................................................................50

Meaning of Rho...................................................................................................................51

Portfolio Management using option Greeks........................................................................52

FinIdeas Software....................................................................................................................53VolHedge.............................................................................................................................53

FinGraph Software...............................................................................................................54

FinExcel...............................................................................................................................55

EasyRMS.............................................................................................................................56

FinTester Software...............................................................................................................57

FIST Software......................................................................................................................58

Conclusion...............................................................................................................................61Bibliography............................................................................................................................62

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Index of Illustrations

Figure 1: FinIdeas Departments...............................................................................................12Figure 2: Distribution of Staff in Various Departments..........................................................12Figure 3: Software Department Work Flow............................................................................14Figure 4: Software Support Process........................................................................................15Figure 5: Education Department Flow....................................................................................16Figure 6: Trading Department Basic WorkFlow.....................................................................16Figure 7: Risk and Investment.................................................................................................20Figure 8: Pay off Call Buyer....................................................................................................31Figure 9: Pay Off Call seller....................................................................................................32Figure 10: Pay off for Put Buyer.............................................................................................34Figure 11: Pay off for Put Seller..............................................................................................35Figure 12: Synthetic Sell Call..................................................................................................36Figure 13: Synthetic Buy Call.................................................................................................37Figure 14: Synthetic Sell Put...................................................................................................37Figure 15:Synthetic Buy Put....................................................................................................38Figure 16: Buy Synthetic Future..............................................................................................38Figure 17: Sell Synthetic Future..............................................................................................39Figure 18: Option Pricing........................................................................................................47Figure 19:TIme Value Decay Curve........................................................................................48Figure 20: Type of Option Greek............................................................................................49Figure 21: Effect of Variables on Option Greeks....................................................................51Figure 22: Overall Relationship at a Glance............................................................................52Figure 23:VolHedge................................................................................................................53Figure 24:FinGraph.................................................................................................................54Figure 25: EasyRMS................................................................................................................56Figure 26:FinTester.................................................................................................................57Figure 27:FIST.........................................................................................................................58

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Introducing FinIdeas

FinIdeas was founded with a goal to educate people in the field of Equity & Derivative Markets and provide them Software which would give them an edge in trading. FinIdeas is a Team of young and committed individuals having diverse education and experience backgrounds.

The Company

The Company was incorporated on January 2nd, 2010 with the vision of educate people in Derivatives market and providing one of the best software solution for Derivatives Trading & Analysis.

Board of Directors

1. Mr. Gavin Chuwar (Chartered Accountant, Certified Treasury Manager)Mr. Govind Jhawar has 12 years of experience in the Capital and Derivatives Market. He is a well known icon in the field of Options Training Programme being conducted by him for the past 6 years. He handles the Marketing division of FinIdeas.2. Mr. Udipth Talera (Gold Medalist Chartered Accountant, Certified Treasury Manager, DBF)Mr. Udipth Talera has 11 years of experience in Capital and Derivatives Market. He possesses acute analytical skills and heads the software development of FinIdeas.3. Mr. Ravi Biyani (Master in Financial Engineering from USA)Mr. Ravi Biyani has 5 years of experience in Capital and Derivatives Market. He is well versed in leading the team and handles activities across various segments of company.4. Mr. Navneet BhatterMr. Navneet Bhatter has 7 years of experience in the Capital and Derivatives Market. He is a trader by profession. He handles the Options Training Programme and conducts practical sessions for the same.5. Mr. Vikas Agarwal (MBA from IIM, Indore)Mr. Vikas Agrawal has 6 years of experience in the Capital and Derivatives Market. He is a passionate Options trader by profession. He is a perfectionist by nature and thus provides FinIdeas the much needed critic to take it to next level

Foundation of Company

FinIdeas goal is to educate people in the field of Equity & Derivative Markets and provide them Software which would give them an edge in trading. FinIdeas is a Team of young and committed individuals having diverse education and experience backgrounds.

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Education Segment

FinIdeas intend to become the most preferred training Institute in the field of Equity & Derivative Markets with a focus towards practical sessions in live/simulated market condition using innovative technologies. The goal is to make people aware of risk and return prevailing in different segments and ways to manage it effectively.

FinIdeas is the first company in India to bring the concept of Options Trading through Live Volatility.

FinIdeas has trained more than 3000 Students in Options Segment through various training courses. FinIdeas conducted their first Seminar on Magic of Options at Ahmedabad.

FinIdeas has conducted many corporate training across India including leading stock brokers like Sharekhan LTD., Ventura Securities Ltd., Fairwealth Securities, Mansukh Securities, SMC Global Securities etc. FinIdeas also tied up with Bombay Stock Exchange and conducted many Derivatives Training program all over India. Bombay Stock Exchange chose FinIdeas to promote its Derivatives products across India. FinIdeas also organized many Practical Training Programs for individuals in various metropolitan cities of India.

Software Segment

Since inception, FinIdeas have launched 8 Software related to options segment in just 4 years. All the software are unique in Indian Derivatives market.

These Software are:1. VolHedge – Options Portfolio Management Tool2. FinGraph – Plots Charts for Live Volatility & Live Greeks3. FinExcel – Export Market Watch to MS Excel for more Efficient analysis of Market4. EasyRMS – Reliable Risk Management System for Corporate Houses5. FinSimulator – Advanced Simulated Trading platform for automated trading.6. FinBroadcaster – Records and Re-Broadcast the Market7. FinTester – for Analyse the Options Strategies on Past data8. FIST – An Algorithm Trading Platform.

FinIdeas is still developing more powerful Software tools for Options Trading & Analysis.

To summarise FinIdeas in one line:“They trade Options, train people for Options and make software for Options”

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Departments within FinIdeas

FinIdeas has mainly 3 departments.1.) Software Department2.) Education Department3.) Trading Department

Figure 1: FinIdeas Departments

Following is the representation of Departments and how staff in each department is distributed.

Figure 2: Distribution of Staff in Various Departments

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Software Department

Finideas first used to outsource its software work from E.Square which was taken in-house by recruiting a good developer team within. The developer team is varied in knowledge in expertise in various languages notably Visual C++, Visual Basic .NET and SQL server at backend. Some of the applications are coded in Visual C#.

The team major role is to create new applications, and continuously upgrade and update existing applications under the guidance of spearhead Mr. UdipthTalera and GovindJhawar.All of the software created are based on the Option derivative market, Equity and Currency markets.

The Roles of the developer team is to program as per requirement and coordinate with support team to solve existing problem as indicated by the support team as in the case of some client has a problem in the current market then the support team will take the machine on remote and then he will solve it manually if that is not possible by the client then he will give the problem to the developer who will try to solve it, if further it is not solved then it will be taken aback to solved by the spearheads.

The problem may be on the client end or maybe on the software or on the software and OS conflicting problem.

The following is the flow chart of how the software and the customer support team handle the software problems.

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Figure 3: Software Department Work Flow

Software Support Process

The Newly Created software re installed on the new client or existing client.If there is a problem on the client side then the problem is solved by the support executive and then the problem in solved by the support executive on an urgent basis by taking his machine on remote desktop, the Software used for remote desktop connection are as follows.

1.) RAdmin2.) Team Viewer3.) Show My Desktop4.) Ammyy Admin

The Computers in the vicinity are interconnected on the same network for sharing internet connection, devices as printers and scanners and servers for UDP broadcast software.The Computers exchange data between themselves using software such as Ipmsg and shared drives. Support is also provided using VNC software.Support executives use Google’s cloud services for storing data and skype for communication between themselves amongst different branches and also s’unno is used.

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Figure 4: Software Support Process

Education Department

In the education department the weekly or daily training sessions are organized by the faculty or support team, the team will first inquire who requires the course, if the course students are within satisfactory limits and they are organizing an inhouse training then the company faculty will travel to the course location at the client premises and educate their desk.

The support team in the education department is the same team that is supporting the software department they will install the software for education on the client computers by taking their machines on remote connections and they will then install the software licenses as per requirement.Prospective course students become software clients later on.Support team also calls the clients regularly for feedback and software updates and offers.

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Figure 5: Education Department Flow

Trading Department

Figure 6: Trading Department Basic WorkFlow

The Trading Department has a desk of traders who are online and offline traders, clients who trade themselves on the terminal are online traders and clients who call up the office are offline traders.They are monitored by their seniors who are highly experienced.

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Portfolio Basics

Before we talk about portfolio let us see investments.

Investments

Investment is the activity, which is made with the objective of earning some sort of positive returns in the future. It is the commitment of the funds to earn future returns and it involves sacrificing the present investment for the future return.

Before investing in any type the person will take into account the following considerations:

1. Return:

The return may be received in the form of yield plus capital appreciation. The difference between the sale price & the purchase price is capital appreciation. The dividend or interest received from the investment is the yield. Different types of investments promise different rates of return. The return from an investment depends upon the nature of investment, the maturity period & a host of other factors.

2. Risk: Risk is inherent in any investment. The risk may relate to loss of capital, delay in repayment of capital, nonpayment of interest, or variability of returns. While some investments like government securities & bank deposits are almost risk less, others are more risky. The risk varies with the nature of investment. Investments in ownership securities like equity share carry higher risk compared to investments in debt instrument like debentures & bonds.

3. Safety : The safety of an investment implies the certainty of return of capital without loss of money or time.

4. Liquidity: Equity shares of companies listed on stock exchanges are easily marketable through the stock exchanges. An investor generally prefers liquidity for his investment, safety of his funds, a good return with minimum risk or minimization of risk & maximization of return.

5. Total Fund to be managed: How much capital is to be invested. The return and the risk are more when more capital is involved.

6. Time Frame for Investment: Lesser the time frame lesser is the risk, more the time frame more the risk, more the time frame more the return and less the time frame less the return.

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Examples of Investment

1. Bonds

2. Fixed Deposits

3. Business Investments

4. Debentures

5. Equity

6. Commodity

7. Currency

8. Future and Options

9. Real Estate

10. Mutual Funds

11. Life Insurance

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Portfolio

In Layman terms a portfolio is a basket of securities.

A combination of securities with different risk & return characteristics will constitute the portfolio of the investor. Thus, a portfolio is the combination of various assets and/or instruments of investments. The combination may have different features of risk & return, separate from those of the components. The portfolio is also built up out of the wealth or income of the investor over a period of time, with a view to suit his risk and return preference to that of the portfolio that he holds. The portfolio analysis of the risk and return characteristics of individual securities in the portfolio and changes that may take place in combination with other securities due to interaction among themselves and impact of each one of them on others. An investor considering investments in securities is faced with the problem of choosing from among a large number of securities. His choice depends upon the risk and return characteristics of individual securities. He would attempt to choose the most desirable securities and like to allocate is funds over this group of securities. Again he is faced with the problem of deciding which securities to hold and how much to invest in each. The investor faces an infinite number of possible portfolios or groups of securities. The risk and return characteristics of portfolio differ from those of individual securities combining to form a portfolio. The investor tries to choose the optimal portfolio taking in to consideration the risk return characteristics of all possible portfolios.

Portfolio management comprises all the processes involved in the creation and maintenance of an investment portfolio. It deals specifically with the security analysis, portfolio analysis, portfolio selection, portfolio revision and portfolio evaluation. Portfolio management makes use of analytical techniques of analysis and conceptual theories regarding rational allocation of funds. Portfolio management is a complex process which tries to make investment activity more rewarding and less risky.

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Portfolio Design

Figure 7: Risk and Investment

Before designing a portfolio one will have to know the intention of the investor or the returns that the investor is expecting from his investment. This will help in adjusting the amount of risk. This becomes an important point from the point of view of the portfolio designer because if the investor will be ready to take more risk at the same time he will also get more returns.

From the above figure we can see that when the investor is ready to take risk of M1, he is likely to get expected return of R1, and if the investor is taking the risk of M2, he will be getting more returns i.e. R2. So we can conclude that risk and returns are directly related with each other. As one increases the other will also increase in same of different proportion and same if one decreases the other will also decrease.

Types of portfolio:

In portfolio Design, we are considering only two types of portfolio.They are as follow:

1. Random Portfolio2. Sector Portfolio

Random portfolioRandom portfolio consists of the scripts that are randomly selected by the investor by its own knowledge and preference of the stocks. Here there is no analysis is done of the script, they are selected on the tips and buts received by the investors from the external sources.

Features of random portfolio

1. There is no method used for selection of the script in the portfolio.

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2. Selection is based on the individual criteria for the scripts.3. The investment is made for higher return in short term.

Advantages of random portfolio

1. Easier to keep a track on the market as not much time wasted in the analysis.2. This portfolio seems to have perform better in short term as script are generally which

are performing better at that time.3. Tips are available everywhere for the investor to pouch.4. It is the experience of the individual that can fetch him good return.

Disadvantages of random portfolio

1. There is every chance that you may select a script that has a very bad background in the market.

2. Not every time the tips pay off for you. You need to have strong reason to select that script.

3. Such portfolios are not able to sustain when there is a crisis in the market.4. There is a very high risk and return involve in such portfolio.

Sector specific portfolio

Sector specific portfolio includes securities of those companies which are in the same

business. Sector portfolios are very useful when there is a particular sector which is doing

very good and has a bright future a head. Sector portfolio has the securities of those

companies that engage in same kind of business.

Features of sector portfolio

Script form the same group of companies that are in to theSimilar type of business.• Maximum exposure to the industry/sector. So any news or event has the direct effect on the portfolio.• Risk regarding the portfolio increases as it is expose to sector specific ups and downs.• Useful investment tools for speculator and short-sellers.• It is better suited for the sectors which have been providing good revenue in the near past.

Advantages of sector portfolio

It is better suited to investors who are willing to take risk.• It provides better short term return then other portfolios.• It is easy to keep a watch on one sector rather than many.

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You can have a good command over the things happening.• Limited exposure to other sectors keeps the portfolio safe from the performance of other sectors in the economy.

Disadvantages of sector portfolio

It is a highly risky portfolio as risk associated with the sector directly affects the performance of the portfolio.• These types of portfolios are not suited for long-term investor as risk taken for the return can be too high.

There is always the possibly many scripts in the sector may not be giving that much good attractive return as others. They may eat the profits from other scripts.

P/B Ratio

Book value is based on historical costs, not current values, but can provide an important measure of the relative value of a company over time. Book value can be figured as assets minus liabilities, or assets minus liabilities and intangible items such as goodwill; either way, the figure that results is the company's net book value. This is contrasted with its market capitalization, or total share price value, which is calculated by multiplying the outstanding shares by their current market price.

You can also compare a company's market value to its book value on a per-share basis. Divide book value by the number of shares outstanding to get book value per share and compare the result to the current stock price to help determine if the company's stock is fairly valued.

In case of our sensex as we can see that it is currently trading at a P/B ratio of 4.41 this shows the average P/B ratio prevailing in the market. So any script trading below the P/B of 4.41 can said to be under valued if we keep the BSE SENSEX as bench mark.

As such there is no guarantee that low P/B would able to give better return but this stocks are considered to be undervalued so one can think that this companies are undervalued so chances of appreciation are very high in case of low P/B scrip. Such companies having low P/B ratio can be considered as value stock and one can thin about investing in those companies.

P/E ratio

The P/E ratio takes the stock price and divides it by the last four quarters' worth of earnings. When a stock's P-E ratio is high, the majority of investors consider it as pricey or overvalued.

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Stocks with low P-E's are typically considered a good value. However, studies done and past market experience have proved that the higher the P/E, the better the stock. One can compare the P/E ratio of the company with that of the market giving a relative measure. One can also use the average P/E ratio over time to help judge the reasonableness of the present levels of prices. All this suggests that as an investor one has to attempt to purchase a stock close to what is judged as a reasonable P/E ratio based on the comparisons made.

Beta Factor

Beta Factor “Beta” indicates the proportion of the yield of a portfolio to the yield of the entire market (as indicated by some index). If there is an increase in the yield of the market, the yield of the individual portfolio may also go up. If the index goes up by 1.5% and the yield of your portfolio goes up by 0.9%, the beta is 0.9/1.5 i.e 0.6. in other words, beta indicates that for every 1 % increase in the market yield, the yield of the portfolio goes up by 0.6%. High beta shares do move higher than the market when the market rises and the yield of the fund declines more than the yield of the market when the market falls.

When investors are bullish on the market, they like to have high beta stocks in their portfolios because if they're right, then their stocks go up faster than the market in general, and their performance is better than the market. If investors are bearish on the market, then they use the low beta or negative beta stocks because their portfolios will go down less than the market and their performance will be better than the general market. And if they want to be neutral, they can then make sure that they have stocks with a beta of 1 or develop a portfolio that has stocks with betas greater than 1 and less than 1 so that they have the whole portfolio with an average beta of 1. A beta for a stock is derived from historical data. This means it has no predictive value for the future, but it does show that if the stock continues to have the same price patterns relative to the market in general as it has in the past, you've got a way of knowing how your portfolio will perform in relation to the market. And with a portfolio.

Interpretation of Beta

When B = 1means that the scrip has same volatility as compared to Index. Suitable for moderate investor.

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When B>1means that scrip is more volatile as compared to market suitable for aggressive investors.

When B<1 then scrip is less volatile as compared to market and suitable for defensive investors.

Beta of scrips plays vital role in scrip selection in Portfolio management. Portfolio can be created in many ways as sector wise, diversified in various sector, beta wise scrip portfolio.

Interpretation of Random Portfolio

• As in the theoretical way we have scene that the Beta shows the movement or change in the price of script vis-à-vis index. And a Beta >1 is more riskier and hence should give more return as compared to the script having Beta < 1. as the person is taking more risk then he should get more return. But in our case we have scene that Moderate portfolio having Beta < 1 has given more return as compared to Aggressive Portfolio.

• So we can easily say that the investment in equity market is subject to market risk and any one having long-term investment horizon should only enter into equity market. This analysis that has been carried out was only for a period of two month there are chances that in the long run aggressive portfolio would outperform the other portfolio

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Derivatives Market

Meaning of Derivatives

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 assets include stocks, bonds, commodities, currencies, interest rates and market indices. Most derivatives are characterized by high leverage.

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Forward

Forward Contract is a contract between two parties to buy or sell an Asset on a pre specified future date at a pre specified price. Forward contract is different from Spot Contract as in spot contract settlement comes at the time of contract while in Forward Contract Settlement comes on a pre specified future date.

Forward contracts are traded only in Over the Counter (OTC) market and not in stock exchanges. OTC market is a private market where individuals/institutions can trade through negotiations on a one to one basis. Forwards are private contracts and their terms are determined by the parties involved

Features of forward contracts:

Custom tailored Traded over the counter ( not on exchanges ) Counterparty risk..

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. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.

As far as Indian Equity market is Concern, NSE is having the most developed Equity Derivatives Market. They have launched 3 Month series for Future Contracts i.e. Current Month (1 month Expiry), Next Month (2-month Expiry) and Far Month (3-month Expiry).

Options

An option is a contract between two party, where one party gives to the other the right, but not the obligation, to buy from (or sell to) the First Party the underlying asset on or before a specific day at an agreed price. In return for giving the right, the party giving the right

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collects a payment from the other party. This payment collected is called the “premium” or price of the option.

Types of Options

Call Options

Call Option is an option where buyer gets the right to purchase the underlying but not any obligation. Buyer of the Call option expects the price to go up and hence purchase right to buy at a specified rate by paying premium. Call option buyer is getting the right to purchase from call option seller and pays the premium to call option seller. The Maximum loss to the buyer of the Option is limited up to premium paid. If price rises than Call buyer earns unlimited profit. The maximum profit to the call seller is up to premium received when market falls and he may make unlimited loss if market rises.

Put Options

Put Option is an option where buyer gets the right to sell the Underlying but not any obligation. Buyer of the Put option expects the price to go down. The Maximum loss to the buyer of the Option is limited up to premium paid. If prices falls than Put buyer earns unlimited profit. Let us look at one example to make it clear.

Swaps

Swaps are private agreements between two parties to exchange cash flows in the future according to a pre-agreed price. The two main types of swaps are:

InterestRateSwaps

This swaps only the interest related cash flows between the parties in the same currency.

CurrencySwaps

This swaps both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

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What is Option Premium?

The total cost of an option. This is the amount which option buyer pays to the Option Seller. The premium of an option is basically the sum of the option's intrinsic and time value.

Type of Options - ITM, ATM & OTM ITM

A call options is said to be “In the Money Option” when spot price is higher than strike price (ITM Call = Spot Price > Strike Price). While a put option is said to be “In the Money Option” when Spot price is below Strike price (ITM Put = Spot Price < Strike Price). In the Money options lead to a positive cash flow if it were exercised immediately.

Intrinsic value of In-The-Money Call Option = Underlying product price - Strike priceIntrinsic value of In-The-Money Put Option = Strike price - Underlying product price

ATM

An option is said to be “At the Money Option” when spot price and strike price are equal. (ATM Option = Spot Price = Strike Price). At the Money options lead to a zero cash flow if it were exercised immediately.

OTM

A call options is said to be “Out of the Money Option” when spot price is below than strike price (OTM Call = Spot Price < Strike Price). While a put option is said to be “Out of the Money Option” when Spot price is higher Strike price (ITM Put = Spot Price > Strike Price). In the Money options lead to a negative cash flow if it were exercised immediately.

Type of Option - American / European

● American Options

American options are options that can be exercised at any time up to expiration date. In NSE all stock options are American type options.

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● European Options

European options are options that can be exercised at the time of maturity only. In NSE all indices options are European type options. These options are easier to analyze than American options.

Option Terminology

Spot Price

Spot price is the current price at which a particular underlying can be bought or sold at a specified time and place.

Strike Price

Strike price is the price at which a specific derivative contract can be exercised. Strike prices are mostly used to describe stock and index options, in which strike prices are fixed in the contract. For call option, strike price is the price at which underlying can be bought, while for put options the strike price is the price at which underlying can be sold. The fixed price at which the owner of an option can purchase (in the case of a call), or sell (in the case of a put) the underlying. It's the price at which the stock will be bought or sold when the option is exercised. The strike price is often called the exercise price.

Intrinsic Value

Intrinsic value refers to the value of a security which is contained in the security itself. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset, and discounting it to the present value. An option is said to have intrinsic value if the option is in-the-money. When out-of-the-money, its intrinsic value is zero.

Time Value

Time Value = Option Value - Intrinsic Value.

More specifically, an option's time value reflects the probability that the option will gain in intrinsic value or become profitable to exercise before it expires. this value depends upon the time period left for expiry and the volatility of the underlying instrument's price. The time value of an option is not negative (because the option value is never lower than the intrinsic value), and converges towards zero with time.Maturity Date

The date on which all open future and option of that series gets settled.

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Premium

The total cost of an option. This is the amount which option buyer pays to the Option Seller. The premium of an option is basically the sum of the option's intrinsic and time value.

Exercise and Assignment

Exercise is the term used when the owner of a call or put (i.e. someone who has a long position in a call or put) uses his right to buy (in the case of a call) or sell (in the case of a put) the stock. Assignment is the term used when someone who has short call or put is forced to sell (in the case of the call) or buy (in the case of a put) the stock. Remember, for every option trade there is a buyer and a seller, so if you are short in any option, there is someone who is long in that same option and who could exercise.

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Call Option

What is Call Option

Call Option is an option where buyer gets the right to purchase the underlying but not any obligation. Buyer of the Call option expects the price to go up and hence purchase right to buy at a specified rate by paying premium. Call option buyer is getting the right to purchase from call option seller and pays the premium to call option seller. The Maximum loss to the buyer of the Option is limited up to premium paid. If price rises than Call buyer earns unlimited profit. The maximum profit to the call seller is up to premium received when market falls and he may make unlimited loss if market rises.

Pay off of Call Buyer

Mr. X has purchased the Nifty 24 June 2013, 5000 Call Option at Rs.200.

Here, Underlying is Nifty. || Strike Price is 5000. || Option is Call Option (Right to Purchase). || Maturity (Expiry) is 24 June 2013. || Premium is Rs.200.

So when spot price goes up above 5000, Mr. X will exercise his right to purchase Nifty at 5000. So he will get benefit when market rises above 5000. So if Market goes up to 5100 he will get Rs.100 back but as he has paid Rs.200 as premium so his net loss would be Rs.100.

Now when market moves the payoff of buyer is as follows:

Figure 8: Pay off Call Buyer

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Call Seller

Now suppose Mr. X has sold the above option. Now his maximum profit is up to premium he received and his loss is unlimited. Now when market moves the payoff of seller is as follows:

Figure 9: Pay Off Call seller

Break Even Point for Call Options

BEP is a point when Options seller and buyer arrive at no profit and no loss situation. It is the price where trader is neither earning nor losing any money. Here, both buyer and seller remain at cost to cost.

For call option BEP = Strike price + premium.

In above both example, 5000 + 200 = 5200. (Strike + Premium)

That means, when spot reaches 5200, Mr. X neither earns nor loses any money.

Benefit of Call Option

The Call Options gives us the Right to Purchase and not any obligations. It indirectly promotes the probability of unlimited profits against risk of limited losses. There are lot of Benefits of Call Options Trading :

Call Buy carries limited loss Profile.

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Call Buy provides Unlimited Profit Profile. Call Buy requires investment of Premium only. So it is having less investment

requirement. Investor can earn time value by selling Call Options. Call Spreads i.e. Bull Call Spread and Bear Call Spread can earn money if your view

goes correct and simultaneously incurs small losses if your view goes wrong. During high volatility, it becomes difficult to keep stop losses in Futures while Call

Options gives us the surety of Max loss figure without keeping any Stop losses.

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Put Option

What is Put Option

Put Option is an option where buyer gets the right to sell the Underlying but not any obligation. Buyer of the Put option expects the price to go down. The Maximum loss to the buyer of the Option is limited up to premium paid. If prices falls than Put buyer earns unlimited profit. Let us look at one example to make it clear.

Pay off of Put Buyer

Mr. Y has purchased the Nifty 24 June2013, 5100 Put Option at Rs.100.

Here, Underlying is Nifty. || Strike Price is 5100. || Option is Put Option (Right to Sell). ||

Maturity (Expiry) is 24 June 2013. || Premium is Rs.100.

So when spot price falls below 5100, Mr. Y will exercise his right to sell Nifty at 5100. So he will get benefit when market falls below 5100. So if Market falls to 4900 he will get Rs.200 back but as he has paid Rs. 100 as premium so his net profit would be Rs.100.

Figure 10: Pay off for Put Buyer

Break Even Point for PUT Options

BEP is a point when Options seller and buyer arrive at no profit and no loss situation. It is the price where trader is neither earning nor losing any money. Here, both buyer and seller remain at cost to cost.

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For Put option BEP = Strike price - premium.

In above both example, 5100 - 100 = 5000. (Strike - Premium)

That means, when spot reaches 5000, Mr. Y neither earns nor loses any money.

Pay off of Put Seller

Now suppose Mr. Y has sold the above option. Now his maximum profit is up to premium he received and his loss is unlimited. Now when market moves the payoff of seller is as follows:

Figure 11: Pay off for Put Seller

Benefit of Put Option

As like Call Options, Put Options also provides us Right but not any Obligation. Here we get Right to Sell. People buy Put Options when they have bearish view of the Market. The main benefits of Put Options Trading are :

Put Buy carries limited loss Profile Put Buy Provides Unlimited Profit Profile. Put Buy requires investment of Premium only. So it is having low investment

requirement Investors can earn Time Value by selling Put Options. Put Spreads like Bull Put Spread and Bear Put Spreads can earn money if your view

goes correct and simultaneously incurs small losses if your view goes wrong.

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Synthetic Options

The meaning of Synthetic is Artificial. Synthetic Options means artificial Options. Before understanding Synthetic Options, we should understand that Call, Put and Futures are completely interlinked with each other. We can mix any two products and can create third one. For Eg.we can make Synthetic Call by joining one Future and one Put.

We can make Synthetic Put by joining one Future and one Call and

We can make Synthetic Future by joining one Call and one Put Options.

Synthetic Options and Futures are very important when we dont get liquidity in any product.

What is Synthetic Call Option

A position created by combining Future and Put options for the purpose of imitating the payout schedule and characteristics of a Call options.

Buy Call = Buy Future + Buy Put

Mr. X has Purchased 5000 call option @ Rs. 100. While Mr. Y has purchased a future at Rs. 5000 and purchase a 5000 put at Rs. 100.Their pay-off at different spot price is as follows.

Figure 12: Synthetic Sell Call

Sell Call = Sell Future + Sell Put

Mr. A has Sold 5000 call option @ Rs. 100. While Mr. B has sold a future at Rs. 5000 and sold a 5000 put at Rs. 100. Their pay-off at different spot price is as follows.

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Figure 13: Synthetic Buy Call

What is Synthetic Put Option

A position created by combining Future and Call options for the purpose of imitating the payout schedule and characteristics of Put options.

Buy Put = Sell Future + Buy Call

Mr. X has Purchased 5000 put option @ Rs. 100. While Mr. Y sold a future at Rs. 5000 and purchase a 5000 call at Rs. 100.Their pay-off at different spot price is as follows.

Figure 14: Synthetic Sell Put

Sell Put = Buy Future + Sell Call

Mr. A has Sold 5000 Put option @ Rs. 100. While Mr. B has purchased a future at Rs. 5000 and sold a 5000 Call at Rs. 100.Their pay-off at different spot price is as follows.

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Figure 15:Synthetic Buy Put

What is Synthetic Future

A position created by combining call and put options for the purpose of imitating the payout schedule and characteristics of a futures contract. In simple terms, Synthetic Future is the position created by combining call and put with same pay-off.

Buy Future = Buy Call + Sell Put

Mr. X has purchased a Future at Rs. 5000. While Mr. Y has purchased a 5000 Call at Rs. 100 and sell a 5000 put at Rs. 100.Their pay-off at different spot price is as follows.

Figure 16: Buy Synthetic Future

Mr. A has sold a Future at Rs. 5000. While Mr. B has sold a 5000 Call at Rs. 100 and purchase a 5000 put at Rs. 100.Their pay-off at different spot price is as follows.

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Figure 17: Sell Synthetic Future

Option Strategies

Before we buy or sell options we need a strategy, and before we choose an options strategy, we need to understand how we want options to work in our portfolio. A particular strategy is successful only if it performs in a way that helps us meet our investment goals.

Simple options strategies are usually the way to begin investing with options. By mastering simple strategies, you'll prepare yourself for advanced options trading. In general, the more complicated options strategies are appropriate only for experienced investors.

Once you've decided on an appropriate options strategy, it's important to stay focused. That might seem obvious, but the fast pace of the options market and the complicated nature of certain transactions make it difficult for some inexperienced investors to stick to their plan. If it seems that the market or underlying security isn't moving in the direction you predicted, it's possible that you'll minimize your losses by exiting early. But it's also possible that you'll miss out on a future beneficial change in direction. That's why many experts recommend that you designate an exit strategy or cut-off point ahead of time, and hold firm. For example, if you plan to sell a covered call, you might decide that if the option moves 20% in-the-money before expiration, the loss you'd face if the option were exercised and assigned to you is unacceptable. But if it moves only 10% in-the-money, you'd be confident that there remains enough chance of it moving out-of-the-money to make it worth the potential loss.

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Let us now proceed towards understanding strategy. The strategies are explained in very structured manner and in a way easy to understand. Strategies are classified in a various way depending on its usage and the way the strategy is formed.

Here are Some Types of Options Strategies you can trade in.

1. Bullish Strategies

2. Bearish Strategies

3. Volatile Strategie

4. Range Bound Strategies

5. Arbitrage Strategies

Bearish StrategiesSell Call / Short Call

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.

Market Scenario: Bearish || Risk: Unlimited || Reward: limited || BEP: Call Strike + Premium

Buy Put / Long Put

Buying a Put is the opposite of buying a Call. When you buy a Call you are bullish about the stock / index. When an investor is bearish, he can buy a Put option. A Put Option gives the buyer of the Put a right to sell the stock (to the Put seller) at a pre-specified price and thereby limit his risk.

Market Scenario: Bearish || Risk: Limited (Premium Paid) || Reward: Unlimited || BEP: Call Strike - Premium

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Bear Put Spread

Establishing a bear put spread involves the purchase of a put option on a particular underlying stock, while simultaneously writing a put option on the same underlying stock with the same expiration month, but with a lower strike price. Both the buy and the sell sides of this spread are opening transactions, and are always the same number of contracts. This spread is sometimes more broadly categorized as a "vertical spread". The bear put spread, as any spread, can be executed as a "package" in one single transaction, not as separate buy and sell transactions.

Market Scenario: Moderately Bearish to Bearish

Risk: Limited || Reward: Limited || BEP: Strike Price of Purchased Put - Net Debit Paid

Bear Call Spread

The name Bear Call Spread signifies that

Bear: This Strategy will earn profit when market is Bearish and will lose money when market is Bullish.

Call: We will use Call Options to make this Spread.

Spread: Spread means combination of Bought and Sold Options. So here we will Buy Calls of one Strike and Sell Calls of another Strike.

So finally Bear Call Spread means the combination of Lower Strike Call Sold and Higher Strike Call Bought so that it will make money when market goes down and will lose money when market goes up.


Risk: Limited || Reward: Limited || BEP: Lower Strike + Net Premium Received

Bear Put Spread

Establishing a bear put spread involves the purchase of a put option on a particular underlying stock, while simultaneously writing a put option on the same underlying stock with the same expiration month, but with a lower strike price. Both the buy and the sell sides of this spread are opening transactions, and are always the same number of contracts. This spread is sometimes more broadly categorized as a "vertical spread". The bear put spread, as any spread, can be executed as a "package" in one single transaction, not as separate buy and sell transactions.

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Risk: Limited || Reward: Limited || BEP: Strike Price of Purchased Put - Net Debit Paid

Put Ratio Back Spread

As the name Put Ratio Back spread suggests

Put: We will use Put Options to make this Spread

Ratio: The proportion of quantity bought and Quantity sold is there in some Ratio.Back Spread: When we buy more quantity of one Strike compare to Quantity sold of other strike, it is called Back Spread. So finally Put Ratio Back spread is the combination of selling one Put of Upper Strike Price and buying double Puts of Lower Strike Price.

Market Scenario: Moderately Bearish to Bearish || Risk: Limited || Reward: Unlimited ||

Upper BEP: Net Premium Received (in case trader has received net Premium otherwise there will not be any Upper BEP)

Lower BEP: (Upper Strike - Lower Strike) + Net Premium Received (incase trader has received net Premium otherwise we will deduct the Net Premium paid amount)

Volatile Strategies

Long Straddle

A Straddle is a volatility strategy and is used when the stock price / index is expected to show large movements. This strategy involves buying a call as well as put on the same stock / index for the same maturity and strike price, to take advantage of a movement in either direction, a soaring or plummeting value of the stock / index. If the price of the stock / index increases, the call is exercised while the put expires worthless and if the price of the stock / index decreases, the put is exercised, the call expires worthless.

Market Scenario: Volatile || Risk: Limited (Net Premium Paid) || Reward: Unlimited

Long Strangle

Short Strangle involves the simultaneous buying of a slightly out-of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same underlying and expiration date. Strangle strategies are suggested over straddle because strangle is low cost strategy. Market Scenario: Neutral (Movement is Range Bound)

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Risk: Limited to net premium paid || Reward: Unlimited

BEP: UPPER BEP: Call Strike + Net Premium

LOWER BEP: Put Strike – Net Premium

Short Call Butterfly

(Buy 2 ATM Call, Sell 1 ITM Call, Sell 1 OTM Call)

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.

Market Scenario: You are neutral on market direction and bullish on volatility.

Risk: Limited {net difference between the adjacent strikes (Rs. 100 in this example) – premium}

Reward: Limited to the net premium received

BEP: Upper BEP = Strike Price of Highest Strike Short Call - Net Premium Received

Lower BEP = Strike Price of Lowest Strike Long Call + Net Premium Received

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Short Put Butterfly

(Buy 2 ATM Put, Sell 1 ITM Put, Sell 1 OTM Put)

A Short Put Butterfly is a strategy for volatile markets. It is the opposite of Long Put Butterfly, which is a range bound strategy. The Short Put Butterfly can be constructed by Selling one lower striking in-the-money Put, buying two at-the-money put and selling another higher strike out-of-the-money Put, 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.

Market Scenario: You are neutral on market direction and bullish on volatility.Risk: Limited {net difference between the adjacent strikes (Rs. 100 in this example) – premium}

Reward: Limited to the net premium received

BEP: Upper BEP = Strike Price of Highest Strike Short Put - Net Premium Received

Lower BEP = Strike Price of Lowest Strike Long Put + Net Premium Received

Short Call Condor

(Sell 1 ITM Call {Lower Strike}, Buy 1 ITM Call Option {Lower Middle Strike}, Buy 1 OTM Call Option {Higher Middle Strike} and Sell 1 OTM Call Option {Higher Strike}).

A Short Call Condor is very similar to a short butterfly strategy. The difference is that the two middle bought options have different strikes.

Market Scenario: Market will cross range but not sure in which direction.Risk: Limited

Reward: Limited

BEP: Upper BEP = Highest Strike - Net Premium

Lower BEP = Lowest Strike + Net Premium

Short Put Condor

(Sell 1 ITM Put {Lower Strike}, Buy 1 ITM Put {Lower Middle Strike}, Buy 1 OTM Put {Higher Middle Strike} and Sell 1 OTM Put Option {Higher Strike}).

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A Short Put Condor is very similar to a short butterfly strategy. The difference is that the two middle bought options have different strikes.

Market Scenario: Market will cross range but not sure in which direction.Risk: Limited

Reward: Limited

BEP: Upper BEP = Highest Strike - Net Premium

Lower BEP = Lowest Strike + Net Premium

Range Bound StrategiesShort Straddle

A Short Straddle is the opposite of Long Straddle. It is a strategy to be adopted when the investor feels the market will not show much movement. He sells a Call and a Put on the same stock/index for the same maturity and strike price. It creates a net income for the investor. If the stock /index 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..

Market Scenario: Less Volatile || Risk: UnLimited || Reward: Limited to the Premium Recived

BEP: Upper Break-even Point = Strike Price of Short Call + Net Premium Received

Short Strangle

Short Strangle involves the simultaneous selling of a slightly out-of-the-money (OTM) Put and an out-of-the-money (OTM) Call of the same underlying stock and expiration date.

Market Scenario: Neutral (Movement is Range Bound)

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Risk: Unlimited || Reward: limited to net premium received

BEP: UPPER BEP: Call Strike + Net Premium

LOWER BEP: Put Strike – Net Premium

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Option Pricing

Factors affecting Options Pricing

There are mainly 5 factors, which affects the pricing of an Option.

Spot Price Strike Price Time to Maturity Volatility Rate of Interest

Figure 18: Option Pricing

Intrinsic and Time value:

The option price, or premium, can be considered as the sum of two specific elements:

Intrinsic Value Time Value

Intrinsic Value:

The intrinsic value of an option is the amount an option holder can realize by exercising the option immediately. Intrinsic value is always positive or zero. An out-of-the-money option has zero intrinsic value.

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Intrinsic value of in-the-money Call Option = Underlying Price - Strike Price

Intrinsic value of in-the-money Put Option = Strike Price - Underlying Price

Time Value:

The time value of an option is the value over and above the intrinsic value that the market places on the option. It can be considered as the value of the continuing exposure to the movement in the underlying product price that the option provides. The price that the market Puts on this time value depends on a number of factors: time to expiry, volatility of the underlying product price, risk free interest rates and expected dividends.

Time to Expiry:

Time has value, since the longer the option has to go until expiry, the more opportunity there is for the underlying price to move to a level such that the option becomes in-the-money. Generally, the longer the time to expiry, the higher is the option’s time value. As expiry approaches, the value of an option tends to zero, and the rate of time value decay accelerates.

Figure 19:TIme Value Decay Curve

Volatility:

The volatility of an option is a measure of the probability of the price movements of the underlying instrument. Volatility is normally expressed in annualized terms. The more volatile the underlying instrument, the greater the time value of the option will be. Volatility does not measure the direction of price change. This means that greater the uncertainty for an option seller higher is the premium he will charge to be compensated. Thus option prices increase as volatility rises and decrease as volatility falls.

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Option Greeks

To maintain a large portfolio efficiently, through knowledge of Option Greeks is very important. Option Greeks give a thorough understanding of the portfolio’s position. The value of each option Greek has its own importance while taking and cutting position. Trader should know the level of Greeks to maintain the portfolio efficiently. By taking neutral position on Greek, trader can maintain profit while minimizing risk. Let us understand Greeks in details to have a thorough idea.

Figure 20: Type of Option Greek

Meaning of Delta

Delta measures the change in option price for a unit change in the price of underlying. So, if my delta is 0.46 it shows that for each unit increase in underlying options price will increase by 0.46 and for each unit decrease in underlying my options price will decrease by 0.46.

Important Points for Delta

Delta of Call Option is always positive and Delta of Put Option is always negative. When you buy Call Option, delta is positive and when you sell Call Option, delta is

negative.

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When you buy Put Option, delta is negative and when you sell Put Option, delta is positive.

Call Delta ranges from 0 to 1 and Put Delta ranges from 0 to -1. Total of absolute value of Call Delta and Put Delta always comes to 1. Delta of Future is always 1.

Meaning of Gamma

Gamma measures the change in Delta with respect to per unit change in underlying. If Gamma value is 0.0008 that shows that my next move in delta will be 0.0008 if underlying changes by 1. So Gamma shows what will be the next change in delta with respect to change in underlying.

Important Points for Gamma

Gamma of Option is always positive.

Gamma of Call and Put Option is same. Gamma is highest at ATM and decreases as Underlying moves away. Gamma of Future is 0.

Meaning of Vega

Vega measures the change in options price per unit change in Volatility. A Vega value of 6.87 shows that for every unit increase in volatility, option price will increase by 6.87. Thus, Vega shows effect of volatility on option price.

Important Points for Vega

Vega of Option is always positive. Vega of Call and Put Option is same. Vega is highest at ATM and decreases as Underlying moves away. Vega of Future is 0.

Meaning of Theta

Theta measures the change in options price per day change in time to expiry. If theta is -3.87 that signify that for each day passes towards expiry the options price will decrease by 3.87.

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Important points for Theta

Theta of Option is always negative.

Theta of Call and Put Option is same. (If rate of interest is not considered into calculation)

Theta is highest at ATM and decreases as Underlying moves away. Theta of Future is 0.

Meaning of Rho

Rho measures the change in options price with unit change in rate of interest. If Rho of Put options is -3.87 that signify that for each unit increase in interest rate, Put option price will decrease by 3.87.

Important Points for Rho

Rho of Call Option is always positive and Rho of Put Option is Negative. Rho of Call and Put Option is different. Rho is highest at ATM and decreases as Underlying moves away. Rho of Future is 0.

Figure 21: Effect of Variables on Option Greeks

ATM Options

Event ActionDelta

Gamma Vega ThetaCall Put

Spot Increases Increases Decreases Decreases Decreases Decreases

Strike Increases Decreases Increases Decreases Decreases Decreases

Volatility Increases Increases Decreases Decreases Decreases Increases

Time Increases 0.5 -0.5 Increases Decreases Increases

Interest Increases Increases Decreases Decreases Decreases

Call - Increases

Put - Decreases

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Delta Gamma Vega Theta

Call Buy + + + -

Call Sell - - - +

Put Buy - + + -

Put Sell + - - +

Future Buy + 0 0 0

Future Sell - 0 0 0 Figure 22: Overall Relationship at a Glance

Where : + is Positive, - is Negative and 0 is neutral relationship

Portfolio Management using option GreeksOption Greeks are indicators to how the dealer should buy or sell Derivatives or Secutities in market condition. Delta, Gamma, Vega Theta dn Rho are parameters which are like the parameters of a person driving a vehicle and he can observe these parameters and act accordingle to minimize risk or maximize risk and profit.

The aggregate Greeks for all scrips are calculated for the portfolio and then displayed by option software this helps the dealer decide whether to buy or sell options in the market.

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FinIdeas Software

1. VolHedge – Options Portfolio Management Tool2. FinGraph – Plots Charts for Live Volatility & Live Greeks3. FinExcel – Export Market Watch to MS Excel for more Efficient analysis of Market4. EasyRMS – Reliable Risk Management System for Corporate Houses5. FinSimulator – Advanced Simulated Trading platform for automated trading.6. FinBroadcaster – Records and Re-Broadcast the Market7. FinTester – for Analyse the Options Strategies on Past data8. FIST – An Algorithm Trading Platform.

VolHedge

Figure 23:VolHedge

VolHedge:

Features:

1. Calculates Implied Volatility of options on real-time basis. A must for Traders.2. Greeks Calculation through liquid option of same strike price when either Call or

Put goes illiquid.3. P/L of Portfolio ascertainable at any point of time.4. Month wise Portfolio Greeks.5. Inbuilt compatibility to calculate Margin through SPAN Software.6. Transaction Charges calculation for initiation as well as square-off of trades.7. Alerts on Price, Greeks or Profit/ Loss.8. Summary of Script wise Greeks and Profit / Loss.9. Charts of Profit and Loss of Option Greeks of a day as well as full maturity at

different Spot Prices.10. Charts of Greeks and Profit /Loss on the click of a mouse11. Online Market watches availability with Implied Volatility.12. Tool for Options research.

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13. Allows research on bhavcopy.14. It works in Online and Offline mode15. Auto/Manual uploading of trades from Trading Terminal to VolHedge.16. User can insert his open position manually or can upload portfolio through MS

Excel.17. Compatibility with MS-Excel allows Import or Export of data.18. Calculates Greeks on the basis of Futures or Equity.19. Select or unselect the positions in portfolio to see the Scenario Analysis.20. Scenario Data in Tabular Form compatible with MS-Excel.21. User can create large number of Portfolios in Market watch.22. Daywise summary of Transaction cost.23. User can settle his account on maturity by uploading bhavcopy of maturity day.24. Software is compatible with almost all the known Trading Software like Neat,

Neat plus, NOW, Odin, ODIN Diet, GETS etc.

FinGraph Software

Figure 24:FinGraph

Features:

1. Plots Implied Volatility, Price, Open Interest, Vega Spread , Vol Spread, Cash to Future Spread, Future to Future Spread , Option LTP Spread Charts, Cross hedge Charts

2. Real time Vega Sheet, a must tool for Volatility Spread Traders3. Real time Market Watch Facility4. Data Export to excel facility5. Vega Spread Calculator6. Real time volatility of best five buy & sell of options in Market picture by price7. On multiple graph chart, we can toggle share scale for better view8. Charts can switch between Line Chart , Candle Stick Chart , Bar Chart9. Various Technical Analysis tools available for advanced charting study

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10. Various studies like Trend line, Rectangle, Fibonacci Price Lines, and Gann Charts etc. can be done at the click of a mouse.

11. User defined multiple series charts12. One click opening of various LTPs, vols, open interest, vega spreads13. Multiple Graphs in one window for e.g. If you plotting cash to future spread

graph. You can simultaneously plot cash graph as well as future graph so as to understand what is moving the spread. Similarly for vol spread & future to future spread

14. User can define volume above which the tick needs to be plotted15. User can see ticks in terms of value (as against graph) & even export them to

excel for further review

FinExcel

Features:

1. FinExcel helps you to export the market watch data in excel form on a real time basis.

2. Enable you to Export the Market Watch data in Excel sheet on a Real time basis.3. User can monitor Volatility (Buy, Sell & LTP) of various options, Future and

Equity.4. Valuable tool for Option Traders, Speculators, Hedgers, Jobbers and Arbitrageurs.5. Enable you to make and track your own strategies.6. Option Greeks from market watch can also be exported to spread sheet.7. Tracking multiple strategies at the same time8. Define your own columns to be exported to excel.9. Does not require any ID or NCFM Certification.10. Real Time Volatility of options11. Helps to approach option based strategies in a faster & better way12. Can create Multiple Excel Sheets13. Not Trading Terminal required.14. Stand Alone Application15. No Server Required16. Ease of use.

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EasyRMS

Figure 25: EasyRMS

Solution for managing a Firm’s Risk Live Dealer-wise Graphs of All Greeks, MTMs, and Margin etc. Simple Drilldown from the Largest to the Minutest Details Scenario Analysis of All Positions Hassle Free Live Updates of All Trades Variety of Customizable RMS Alerts Export Data to Excel Facility

Manage Firm’s Risk from various angles Group Wise Dealer Wise Scrip Wise

Is compatible with following types of data

NOTIS trade file GETS SQL Server Database ODIN SQL Server Database 0 terminal trade file GETS admin trade file ODIN admin Trade file NOW admin Trade file

Dealerwise

Delta in Rs. ,Delta in shares, Gamma, Vega, Theta for today Delta in Rs. ,Delta in shares, Gamma, Vega, Theta for tomorrow Gross MTM, Net MTM, Expense, Square off Exp& Projected MTM % movement risk indicator Margin Total Margin Allowed % Margin Utilised Drilling down the above stated information to see Scripwise information

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Further double click to see DealerwiseScripwise detailed information Scripwise

Delta, Gamma, Vega, Theta for today Delta , Gamma, Vega, Theta for tomorrow Gross MTM, Net MTM, Expense, Square off Exp& Projected MTM % movement risk indicator Drilling down the above stated information to see Dealerwise information Further double click to see DealerwiseScripwise detailed information

Groupwise

Delta in Rs. ,Delta in shares, Gamma, Vega, Theta for today Delta in Rs. ,Delta in shares, Gamma, Vega, Theta for tomorrow Gross MTM, Net MTM, Expense, Square off Exp& Projected MTM % movement risk indicator Margin Tot Margin Allowed % Margin Utilized Drilling down the above stated information to see Dealerwise information Further Drilling down the above stated information to see Scripwise

information Further double click to see DealerwiseScripwise detailed information

Alerts Facility Live Graphs

FinTester Software

Figure 26:FinTester

Main features… User can view…1. Daily Market Watch2. Call/Put/ Future LTP3. Change in LTP4. Volatility5. Change in Volatility

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6. Primary Greeks Like Delta, Vega & Theta7. Secondary Greeks Like Gamma, Volga &Vanna8. Butterfly, Straddle, Calendar9. Delta Ratio, Vega Ratio & Price Ratio10. Conversal Reversal (Put Call Parity)11. Volatility Spread (Call to Call, Call to Put and Put to Put Spread)12. Open Interest, Change in Open Interest and Number of contracts13. User can view current month, next month and far month Market Watch on one Screen14. User can select or unselect the columns as per his requirement15. You can run the strategy on Past Data16. All Nifty data for current month, next month and far month are available from 1St

January, 200917. User can trade any strategy on just one click of button18. User can simulate the strategy on the basis of time, Volatility or spot price19. User can change decimal settings on click of button20. Simulator tracks Portfolio Greeks and Profit and loss on daily basis21. Steps recording is available, user can rewind and forward his strategy.22. User can view separate calculation of impact of each Greeks on Profit or Loss23. View full Maturity data of any strategy on one screen24. Copy the data of full maturity on excel25. User can view market watch and simulator simultaneously26. User can make and save Workspace

FIST Software

Figure 27:FIST

Introduction:FinIdeas System Trader (FIST) is an Algo Trading Platform from FinIdeas. It is a one-

stop solution for all trading needs of an Options Trader. Developed in VC++ and equipped with the latest Options Algos it is a unique combination of technological performance and trading functionalities

FIST Dealer Terminal: Complete CTCL trading platform

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Inclusive Algo modules:o IV Ordero IV Spread Ordero IV Spread 2 Lego IV Spread 3 Legso 3 Options Algo

Strategies that can be traded:o Vol Spreado Calendar Spreado Bull / Bear Spreado Ratio Spreado Straddle / Strangleo Butterfly

Features of FIST:A. System Architecture:

FIST works on Server Client Architecture (Distributed Computing system), where in A. FIST Client does all the process of algorithms B. Server receives all orders from clients and communicates to the exchange and

Vice versa. FIST has a track record of releasing order to exchange in the same MS of receiving the broadcast.

B. ConnectivityFor an efficient algo performance, lease line is the most preferable option.

C. Strategies available in FIST:FIST is made as an open ended solution for trading various strategies. User can

trade almost all strategies which involves A. One option like Volatility trading, In the Money option trading etc.B. Two options like Volatility Spread, Price ratio, Price difference based

strategies with various methods of quantity trading like Delta ratio based, Vega ratio based or User defined.(Option to trade in terms of Quote based, Two Leg orders or three leg orders)

C. Three options like Butterfly, Two options spread with delta or Vega neutralizing by third option etc.

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D. Feasibility to make changes in already available strategy or developing new strategy:

Any strategy can be implemented in FIST, provided the logic is available with clarity. Time and cost to implement the same will depend on the intricacies of strategy. We would be very much ready to implement any strategy on cost to cost basis, provided FINIDEAS is free to offer the strategy to other clients as well. If it has to be made exclusive for BLB then the price will be a multiple of 3X to the actual cost incurred by FINIDEAS.

Other products of FINIDEAS:

A. FinSimulator: It is a simple product, which in combination with FIST is used to trade in live market without sending any trade in Exchange and hence without risking live money trader can learn live market intricacies of strategies.

B. FinBroadcaster: This is used to record live market broadcast of exchange & can be used to replay the broadcast after market so as to try strategies which we could not try in live market.

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ConclusionTrue Portfolio Management is only possible by successful speculation and experience of the market. The portfolio management can be made efficient by employing mathematical foundations laid by experts. But in reality market prediction is not possible and judgment comes truly by experience.

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Bibliography

The FinIdeas official website provides details about derivatives and Greeks and strategies.www.FinIdeas.com

Financial Management:I.M Pandey

Option Pricing:The Complete Guide to Option Pricing Formulas 2006 2nd Edition. Espen-Garder-Haug

Option Derivatives:Options Futures and Other Derivatives 8th ed. John Hull

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http://www.FinIdeas.com/

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