This study tries to demonstrate the earnings potentials on Indian financial markets through employing a simple trade which outperforms other forms of investments. 10 stocks out of Nifty 50 are taken into consideration for this academic exercise on which the short straddle will be deployed based on quarterly earnings announcements and using the returns out of such activity I am trying to make a point that Indian retail investors need not be a skeptic and a well planned and deployed the strategy will outperform their existing investments. We also find out through statistical methods whether a more than 5% shift in the underlying would cause losses when in case of deployment of a short straddle.

1. “Study on Profitability
of Short Straddles on event-based Vega Decay”
With reference to
Tesro Investments PVT LTD, Hyderabad
A Project Report submitted in partial fulfillment of the requirement for the award of
MASTERS DEGREE IN BUSINESS ADMINISTRATION
(INTERNATIONAL BANKING & FINANCE)
By
DOKUPARTHI SANDEEP
(Roll No: 121924101003)
GITAM INSTITUTE OF MANAGEMENT
GITAM (Deemed to be University)
(Established U/S 3 of UGC Act, 1956)
VISAKHAPATNAM
(2019-21)

2. Abstract
This study tries to demonstrate the earnings potentials on Indian
financial markets through employing a simple trade which outperforms
other forms of investments. 10 stocks out of Nifty 50 are taken into
consideration for this academic exercise on which the short straddle will
be deployed based on quarterly earnings announcements and using the
returns out of such activity I am trying to make a point that Indian
retail investors need not be a skeptic and a well planned and deployed
the strategy will outperform their existing investments. We also find out
through statistical methods whether a more than 5% shift in the un-
derlying would cause losses when in case of deployment of a short straddle.
i

4. CERTIFICATION BY TESRO
This is to certify that DOKUPARTHI SANDEEP, MBA in International
Banking & Finance student (Enrollment No 121924101003), GITAM Institute
of Management, GITAM University has done the project from 21 May 2020 to
14 August 2020 on “some super cool title” in our Organization for submission in
partial fulfillment for the award of Post Graduate Degree of Master of Business
Administration by GITAM (Deemed to be University) and his/her work has
been satisfactory.
iii

6. Acknowledgements
It is my pleasure to acknowledge and express my gratitude to all those who
helped me throughout in the successful completion of this project.
I am very thankful to Sri.RALLAPALLI GIRISH CHANDRA CEO &Director,
of TESRO INVESTMENTS (Hyderabad) Private Limited, MADHAPUR,
Hyderabad, for extending support throughout the project.
I wish to express my gratitude to Prof. YEJJU GOUTHAMA RAO, Dean and
Director, GITAM Institute of Management, GITAM University, Visakhapatnam,
for giving me this valuable opportunity to experience the work culture in an
organization.
I am grateful to Dr. KHALIQ LUBZA NIHAR, Associate Professor, GITAM
Institute of Management, GITAM University, Visakhapatnam for her continuous
guidance to accomplish this project work, successfully.
DOKUPARTHI SANDEEP
MASTERS OF BUSINESS ADMINISTRATION
(INTERNATIONAL BANKING AND FINANCE)
121924101003
v

8. STUDENT DECLARATION
I, DOKUPARTHI SANDEEP a student of Masters of Business Administration
International Banking & Finance (MBA IBF), GITAM Institute of Management
(GIM), GITAM University, hereby declare that the project work initiated on
at TESRO INVESTMENTS PVT LTD. is a genuine work done by me in
partial fulfillment for the requirement of the degree of Masters of Business
Administration. I confirm this has not been published or submitted elsewhere
for the award of any degree in part or in full.
vii

10. CERTIFICATE
This is to certify that the project report titled “A Study on Profitability
of Short Straddles on event-based Vega Decay” is an original work carried
out by DOKUPARTHI SANDEEP(Enrollment No 121924101003), under my
guidance and supervision, in partial fulfillment for the award of the degree of
Masters of Business Administration in International Banking & Finance by
GITAM Institute of Management, GITAM University, Visakhapatnam, during
the Academic year 2019-2021. This report has not been submitted to any other
University or Institution for the award of any Degree/Diploma/Certificate.
Name and Address of the Guide: Signature of Guide
Dr. KHALIQ LUBZA NIHAR, Ph.D
Associate Professor
GITAM Institute of Management
Visakhapatnam
ix

12. Contents
Abstract i
CERTIFICATION BY TESRO iii
Acknowledgements v
STUDENT DECLARATION vii
CERTIFICATE ix
Contents xi
List of Figures xiii
List of Tables xv
1 Introduction 1
1.1 Need or Significance of Study . . . . . . . . . . . . . . . . . . 1
1.2 Objectives of the study . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Scope of the study . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Project Methodology . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Data Collection . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6 Drawbacks of the study . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
I The Groundwork 5
2 The Industry & Company Profile 7
2.1 Industry Profile . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 The Company Profile . . . . . . . . . . . . . . . . . . . . . . . 9
3 Theoretical Framework 11
3.1 Topic Related concepts . . . . . . . . . . . . . . . . . . . . . . 11
3.2 Review of Literature . . . . . . . . . . . . . . . . . . . . . . . 16
xi

13. Contents
II The Research 17
4 Analysis of The Study 19
4.1 Short Straddle with Vega Decay . . . . . . . . . . . . . . . . . 19
4.2 A Shift in price of underlying vs profitability . . . . . . . . . . 21
5 Findings & Conclusions 23
5.1 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.2 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Appendices 25
A Important Definitions 27
B Data Tables 29
Bibliography 33
xii

14. List of Figures
3.1 Payoff from buying a Forward/Future Contract= [ST-F0(T)]. . . . 13
3.2 Payoff from selling a Forward/Future Contract= -[ST-F0(T)]. . . . 13
3.3 Payoff from various kinds of Options . . . . . . . . . . . . . . . . . 14
xiii

16. List of Tables
4.1 Short Straddle Index & Annual Payoff . . . . . . . . . . . . . . . 20
4.2 Actual Data for Chi-Square . . . . . . . . . . . . . . . . . . . . . . 21
4.3 Expected Data for Chi-Square . . . . . . . . . . . . . . . . . . . . 21
B.1 Portfolio Performance of the year 2018 (Figures in Rupees) . . . . 30
B.2 Portfolio Performance of the year 2019 (Figures in Rupees) . . . . 31
B.3 Table Contains percentage change in the underlying and respective
profit during that quarter . . . . . . . . . . . . . . . . . . . . . . . 32
xv

18. CHAPTER 1
Introduction
sec:intro
1.1 Need or Significance of Study
Indian financial markets are developing and improving day by day and the
number of participants who are entering into formal financial industry is
increasing at a very high rate thanks to discount brokers on digital platforms it
has become very easy for individuals to perform their trading activities.
We as a nation have come a long way when it comes to our financial industry
but still, there is a lot of scope for growth and formalisation of the financial
industry and its transactions which will give a big boost to the economy
through the means of efficient employment of capital. Financial markets
provide an opportunity to earn much higher returns relatively than other
traditional investment avenues like mutual funds, fixed deposits, etc.
1.2 Objectives of the study
This study has been conducted to demonstrate that with well-placed trade
strategies even an amateur or a novice can make more money in financial
markets than traditional investment avenues.
1) Back-testing short straddles based on historical stock price data and
historical option chain for vega decay based profitability.
2) Checking whether a shift of more than 5% in the underlying would cause
losses when short straddles are deployed.
1.3 Scope of the study
The Research is confined to 10 out of Nifty 50 stocks which have good liquidity
and were not price adjusted whether be it stock splitting or stock merger.
The time scope of the research embraces 2 years 2018 & 2019. Prior to 2018
there was not enough liquidity in the options market and post 2018 there was
enough open interest at various strike prices to get into trades and employ
various strategies easily. Therefore, the research period is convenient for testing,
due to the presence of Liquidity in the market and open interest. Another thing
is that the performance level of the strategies could vary remarkably depending
on the period (when there is high or low volatility on the market). Such a time
1

19. 1. Introduction
scale enabled the holistic assessment of the profitability of the strategy.
1.4 Project Methodology
The methodology of the study is based on secondary data collected through
secondary sources like the NSE portal & in.investing.com and is quantitative in
the approach where that data is used for calculating payoffs from quarterly
short straddles.In order to construct the straddle returns, we use data from the
NSE. To isolate possible effects of stock market returns on the straddle returns,
the straddles are constructed to be beta- neutral.By virtue of its construction,
the payoff of an ATM straddle is insensitive to small fluctuations in the under-
lying asset’s return.
1.5 Data Collection
Data for the research was obtained from the NSE portal, which is run by
National Stock Exchange where information about open interest, Option
premium, strike prices and other relevant information of option chains were
obtained and from Investing.com the historical market prices of the underlying
were obtained.
1.6 Drawbacks of the study
The following are the drawbacks of this study:
• Sampling Error 10 out 50 top-performing stocks have been taken into
consideration and their historical option chains of 2 years have been taken
into consideration.
• Time Value of money has not been taken into consideration.
• Transaction costs associated with entering into trades and employing
trade strategies have not been taken into consideration.
• Out of the Option Greeks only Vega is taken into consideration and other
factors that might affect option prices are not taken into consideration.
• The data is little dated and a lot has changed in the year 2020.
2

20. 1.7. Outline
1.7 Outline
The rest of the text is organised as follows:
Chapter 2 This chapter contains an Indian Financial Industrial Profile and the
Company’s profile.
Chapter 3 Asserts the basic concepts which are related and limited to this
research project’s scope.
Chapter 4 This chapter contains the analytical part of this research project.
Chapter 5 This chapter contains findings & results of the research project and
ends with conclusions.
Appendix A features definitions of some words which are used in this document.
Appendix B consists of tables of data which has been used for the purpose of
conducting this research activity.
3

22. PART I
The Groundwork

24. CHAPTER 2
The Industry & Company Profile
sec:second
2.1 Industry Profile
Numerous measures to intensify amendments in the capital market have been
taken by the Indian Government. The IPO process simplifies, allowing qualified
foreign investors (QFIs) to access the Indian bond market. Unifying the
Insolvency and Bankruptcy Code, introducing Real Estate Regulation & taking
steps towards financial inclusion, Jan Dhan accounts are under the amendment
umbrella. The FPIs in Indian equities had a five-year mark of Rs 101,122 crore
in 2019. In India’s capital markets, investment by FPIs hit a net Rs 12.30 lakh
crore amidst FY02-21 (till 09 June 2020).
India’s financial services sector covers various domains ranging from non-banking
financial companies to capital markets, including the insurance sector. In 2019,
India’s gross national savings (GDS) was 30.50 percent as a percentage of
GDP. An escalation of US$ 2.5 billion across 17 initial public offerings (IPOs)
came up in the same year(2019). Ultra-High Net Worth Individuals’ value is
estimated to hike to 10,354 in 2024 from 5,986 in 2019. India took a splendid
position worldwide in protecting shareholders’ rights on the back of reforms by
the SEBI in the report of World Bank’s Ease of Doing Business 2020. India’s
asset management industry holds the reputation of being listed as one of the
fastest-growing globally. In March 2019, corporate investors Assets Under
Management set foot on Rs 9.55 lakh crore, while HNWIs made it to Rs 7.52
lakh crore, and retail investors achieved Rs 6.30 lakh crore (US$ 90.12 Billion).
India is among the top-tier nations in terms of HNWIs in the Asia-Pacific zone.
The value of alternative investment funds hiked from Rs 13,776 crore (US$
1.97 billion) in June 2016 to Rs 74,817 crore (US$ 10.70 billion) in June 2019.
The Mutual Fund industry’s Asset Under Management escalated from Rs 10.96
trillion in October 2014 to Rs 24.54 trillion in May 2020. In 2019, convergence
into mutual fund schemes via the Systematic Investment Plan (SIP) channel
reached Rs 82,453 crore. Equity mutual funds recorded a net incursion of Rs
8.04 trillion by the end of December 2019. [2]
Commercial banks are advancing towards clearing non-performing loans. There
are still substantial improvements yet to happen. Government banks account
for about 70 percent of assets in the state’s banking sector. This massive
participation of the public sector contorts markets, making it challenging for
India to work upon the financing gaps in the main field of advancements such as
7

25. 2. The Industry & Company Profile
infrastructure, small and medium-sized businesses, and housing. Non-banking
financial corporations have come out as a chief source of credit for businesses
and consumers. The financial sector grapples with these issues at a difficult
time for the global economy. Global growth is slowing amid torpid investment
and attenuated trade. India’s economy is facing challenges, with consumption
and investment slowing down. Bond returns have gone down with negative
graphs for many top bond issuers worldwide, benefiting an increasingly narrow
group and leaving the productive assets needed for broad-based growth under-
funded, including India. All this creates a problematic backdrop for reform.
Concurrently, it emphasizes the call for conclusive action to allow accelerated
growth.[5]
The opportunity is enormous. If we overcome the current challenges, India has
the potential to contrive one of the world’s most significant domestic financial
sectors. Speedy private-sector credit growth would add directly to GDP, jobs,
and median income.
The Stock Exchanges in India
Most of the trading in the Indian stock market is conducted on one of its two
stock major exchanges: the Bombay Stock Exchange (BSE) and the National
Stock Exchange (NSE). The BSE has been in existence since 1875 & the NSE
was founded in 1992 and started trading in 1994, however, both exchanges
follow the same trading mechanism, trading hours, and settlement process. As
on February this year, the BSE had 5,518 listed companies, whereas it’s rival
NSE had about 1,799 as of Dec. 31, 2019, .
Almost all the significant companies of India are traded on these two exchanges.
The BSE is the older stock market but the NSE is the largest stock market
in India, in terms of volume of transactions settled & the NSE is a more
liquid exchange. In terms of market capitalization, they’re both comparable at
around $2.3 trillion. The exchanges compete for the order flow that leads to
diminished costs, greater market efficiency, and new innovation. The presence
of arbitrageurs keeps the prices on the two stock exchanges within a very tight
range.[7]
8

26. 2.2. The Company Profile
Brokerage
A stockbroker is a professional who carries out buy and sell orders for stocks
and other securities for clients. They are affiliated to a broking firm and
manage transactions for retail and institutional customers. Brokers receive
commissions for their services.
Types
Full-Service Brokers:A full-service broker is a licensed financial broker-dealer
firm that provides a large motley of services to their clients, including research
and advice, financial planning, tax tips, and much more. This all comes at
a relatively higher price, as commissions at full-service brokerages are much
higher than those at discount brokers.
Discount Brokers:A discount broker is the one who carries out buy and sell
orders at a discounted commission rate than those of full-service brokers. A
discount broker doesn’t perform analysis or provide investment advice on a
client’s behalf.
2.2 The Company Profile
Tesro Investments PVT LTD is a financial intermediary company which has its
registered office in Madhapur, Hyderabad.
The company was incorporated on the 11th
of January in 2019
Primary Business Activities
Agency Trading
Agency Broking is an act of intermediary between an exchange/market and the
participants of the market to facilitate the transactions with the exchange for a
fee. Agency broker like the name suggests acts as an agent towards their principle
client to carry out transactions in the market and these services are typically
used by large clients to Cater to specific and customized needs to institutional
investors of High net worth investors which is not economical for retail investors.
Proprietary Trading
When the company leverages its capital to take advantage of the markets to
gain returns instead of trading for the commission it is known as proprietary
trading. Proprietary traders can utilize a wide range of strategies that include
index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis,
volatility arbitrage, technical analysis, and/or global macro trading and they
have a competitive edge over other players as they won’t be paying for services
towards itself.
9

28. CHAPTER 3
Theoretical Framework
sec:third
Derivatives are those assets whose value is determined from the value of some
underlying assets. The underlying asset may be equity, commodity or currency.
The list of derivative assets is long. The derivatives are most modern financial
instruments in hedging risk. The individuals and firms who wish to avoid or
reduce risk can deal with the others who are willing to accept the risk for a price.
A common place where such transactions take place is called the ’derivative
market ’. As the financial products commonly traded in the derivatives market
are themselves not primarily loans or securities but can be used to change the
risk characteristics of underlying asset or liability position, they are referred to
as ’derivative financial instruments ’or simply ’derivatives’. These instruments
are so called because they derive their value from some underlying instrument
and have no intrinsic value of their own. Forwards, futures, options, swaps,
caps floor, collar etc. are some of the commonly used derivatives. The world
over, derivatives are playing a key part of the financial system.
The existence of derivatives begs the obvious question of what purpose they
serve. If one can participate in the success of a company by holding its equity,
what reason can possibly explain why another instrument is required that
takes its value from the performance of the equity? Although equity and
other fundamental markets exist and usually perform reasonably well without
derivative markets, it is possible that derivative markets can improve the
performance of the markets for the underlings. As you will see later in this
reading, that is indeed true in practice.Derivative markets create beneficial
opportunities that do not exist in their absence.Derivatives can be used to
create strategies that cannot be implemented with the underlyings alone.
3.1 Topic Related concepts
Dervatives
A derivative can be defined as a financial instrument whose value derives from
the values of other, more basic, underlying variables.[1]
Usually, the variables underlying the derivatives are prices of assets which are
traded but it can also be event, outcome or index, etc. Derivatives are legal
contracts and the buyer of the contract holds a Long Position and on the
other hand the seller of the contract holds the Short Position in which the
rights and/or obligations are defined of either participant.
11

29. 3. Theoretical Framework
Essential Elements of Derivatives Contract
There are four main types of derivatives contracts: forward contracts (forwards),
futures contracts (futures), option contracts (options), and swap contracts
(swaps). Each of these will be discussed in the following sections. All derivatives
contracts specify four key terms:
1)Underlying Derivatives are constructed based on an underlying, which is
specified in the contract. Originally, all derivatives were based only on tangible
assets, but now some contracts are based on outcomes. Examples of underlyings
include Agricultural produce, Currencies, Natural Resources, Bullion, etc. A
derivative’s underlying must be clearly defined because quality can vary.
2)Size & Price The contract must also specify size and price. The
size is the amount of the underlying to be exchanged. The price is what the
underlying will be purchased or sold for under the terms of the contract. The
price specified in the contract may be called the exercise price or the strike
price. Note that the price specified in the contract is not the current or spot
price for the underlying but a price that is good for future delivery.
3)Expiration Date All derivatives have a finite life; each contract
specifies a date on which the contract ends, called the expiration date.
4)Settlement Settlement describes how a contract is satisfied at expir-
ation. Some contracts require settlement by physical delivery of the underlying
and other contracts allow for or even require cash settlement. If physical
delivery to settle is possible, the contract will specify delivery location(s).
Contracts with underlying outcomes, such as heating or cooling days, cannot
be settled through physical delivery and must be settled in cash. In practice,
most derivatives contracts are settled in cash.
Why Derivatives?
Derivatives can be created on any asset, event, or outcome, which is called
the underlying.The underlying can be a real asset, such as wheat or gold,
or a financial asset, such as the share of a company. The underlying can
also be a broad market index. The underlying can be an outcome, such
as a day with temperatures under or over a specified temperature (also
known as heating and cooling days), or an event, such as bankruptcy.
Derivatives can be used to manage risks associated with the underlying, but
they may also result in increased risk exposure for the other party to the contract.
12

30. 3.1. Topic Related concepts
Kinds of Derivatives
Forwards are an over-the-counter derivative contract in which two parties
agree that one of them, the buyer will purchase an underlying from the other
party, the seller, at some later on an agreed date at an agreed fixed price when
they sign it[6].
Futures are specialised form of Forward contracts which are standardized and
are traded on an exchange and enjoys a higher level of transparency.
Figure 3.1: Payoff from buying a Forward/Future Contract= [ST-F0(T)].fig:BFF
Figure 3.2: Payoff from selling a Forward/Future Contract= -[ST-F0(T)].fig:SFF
ST:Denotes the spot price of the underlying asset at time T.
F0(T):Denotes the value established at time 0 and applies to a contract
expiring at time T. (Forward/Future Price)
13

31. 3. Theoretical Framework
Options
are contingent claims where one party buys claim from a writer/seller of the
contract to buy or sell an underlying asset at a fixed price and on a specific
expiration date or before it. The buyer of the contract has the right to exercise
their claim on or before(contextual) expiration date of the option. There are
two types of options, the one where the buyer gets right to buy the underlying
is called the Call or Call Option and when he/she gets right to sell the
underlying is called the Put or Put Option.
The right conveyed by the option only lasts a certain period of time and then
the right expires - at its maturity or expiration. The seller of an option has no
choice. He must meet his obligation to buy [sell if the right of the purchaser to
do so is exercised at the agreed exercise/strike rate. It is the purchaser who
has choice, he does not have to exercise the right to buy/sell at the strike rate
agreed if it is better from his prospective to buy/ sell out spot, he can instead
walk away from the option. In this respect options differ from futures where
holders of positions do have the obligation to buy/sell the underlying asset.
At worst the purchaser will lose the premium, but can gain substantially if
the option is worth exercising. Options come in two varieties - European and
American. In European option, the holder of the option can only exercise his
right (if he so desire) on the expiration date. In an American option he can
exercise this right any time between purchase date and the expiration date.
Figure 3.3: Payoff from various kinds of Optionsfig:OPO
14

32. 3.1. Topic Related concepts
The growth in organized option markets has resulted with the developments
in Option Pricing Theory made by Black and Scholes ( 1973), since then
the theory has been modified and extended. The option market is not only
extended to stocks dealings but also to foreign currencies, commodities etc.
An option is the right but not the obligation to enter into a transaction. An
option is the right, but not the obligation, to buy or sell something at a stated
date at a stated price. An option contract gives the holder of the contracts the
option to buy or sell shares at a specified price on or before a specific date in
the future. The buyer of the contract pays the writer (or seller) for the right’
but not the obligation, to purchase shares etc. from, or sell shares etc. to the
writer at the price fixed by the contract (the striking or exercise price). The
right to choose, therefore the option, is sold by the seller (writer) of the option
to the purchaser (holder) in return for a payment (premium).
Features of Options
The important features of options contracts are as follows:
(a) The option is exercisable only by the owner, namely the buyer of the option.
(b) The owner has limited liability.
(c) Owners of options have no right affordable to shareholders such as voting
right and dividend right.
(d) Options have high degree of risk to the option writers
(e) Options are popular because they allow the buyer profits from favourable
movements in exchange rate.
(f) Options involve buying counter positions by the option sellers.
(g) Flexibility in investors needs.
(h) No certificates are issued by the company.
(i) An investor who writes a call option against stock held in his portfolio is
said to be selling ’covered options ’. Options sold without the stock to back
them up are called ’naked options ’.
Option Greeks
The five figures commonly used by option traders are represented by Greek
letters: delta, gamma, theta, vega, rho. The figures are referred to as option
greeks. Vega, of course, is not an actual letter of the greek alphabet, but in the
options vernacular, it is considered one of the greeks.
Delta is the rate of change of an option’s value relative to a change in the
price of the underlying security.
Gamma is the rate of change of an option’s delta given a change in the price
of the underlying security.
Theta is the rate of change in an option’s price given a unit change in the
time to expiration.
Vega is the rate of change of an option’s theoretical value relative to a change
in implied volatility.
Rho is the rate of change in an option’s value relative to a change in the
interest rate.
15

33. 3. Theoretical Framework
Short Straddle Strategy
In this strategy puts and calls are short at the money with a short time to
expiration (one month or less) in order to pick up income. Because in short
options, time decay works for in favor of the trader, one only select short-term
expiration dates. Also the trader is exposed to potentially unlimited risk, which
is another reason for making this a short-term strategy. Each leg of the trade
has uncapped downside. If the stock starts going ballistic in either direction,
then the position becomes precarious to say the least. If the stock remains
range bound, then it will fetch make a limited profit.
3.2 Review of Literature
Indian retail investors act as a herd and they come with an emotional mindset
of loss aversion[8] that can explain the primary reason for lack of enough
participation in Indian financial markets. For Indian retail investors the chances
of losing some money weighs more than the probability of gaining extra and
maybe that explains why the skepticism exists in the minds of retail investors
when it comes to domestic financial markets.
Indian investors are also highly sentiment driven [4] and there is a strong
relationship between sentiment and stock market volatility.
Because Indian retail investors essentially act as a herd and are highly senti-
mental they are likely to make knee-jerk reactions to quarterly announcements
by the companies which causes a rise in the implied volatility which jeopardizes
the earning potential of traders.
16

34. PART II
The Research

36. CHAPTER 4
Analysis of The Study
sec:fourth
4.1 Short Straddle with Vega Decay
The main purpose of getting into this study to demonstrate that a trader who
is a beginner when he or she places proper strategies while being fully aware
of them will be able to beat traditional investment avenues in terms of yield
or return on investment over time and like always rewards always comes with
appropriate risk.
To be able to demonstrate the potential of earnings in the financial markets
the study has taken a scenario in which it has employed an options strategy
which will fetch losses in cases of high volatility due it’s nature at instances
where there will be high volatility and we take advantage of that vega decay to
get returns out of that strategy employed and still be able to beat traditional
investment avenues.
The risk profile of short straddle option strategy is uncapped or unbounded
whereas the returns on it are bounded this strategy is deployed at the time of
quarterly earnings announcements where there will be reasonably high volatility
because Indian traders are knee-jerk reactors[3].
For the purpose of this study I will compare the returns of a portfolio with a
capital of Rs. 10,00,000 which is to be used as a margin requirement to be able
to deploy short positions and hence the strategy and compare the yield with
fixed deposit rate of PNB Housing Finance which is at 8%.
In the study, the relationship that is most interesting is that of between short
straddles and profitability.
The study proposes that in normal situation of financial & economic conditions,
short straddles are profitable, leading to a yield greater than that of provided
by the banks of fixed deposits which is at 8% provided by PNB Housing
Finance(2020).
Hypothesis 1: In the first hypothesis a test is conducted where the possibility
of obtaining yields higher than that of what PNB Housing Finance is offering
in the market which is at 8% through the implementation of short straddle
19

37. 4. Analysis of The Study
trading strategy based on quarterly earnings announcements.
Methodology Employed
In this work analyses are carried out upon short straddles:
•The Method starts with enlisting the stocks on which stock the strategy has
to be employed.
•Then short selling both calls and puts at the money of the stocks selected a
day prior to the announcement of quarterly earnings announcements with the
same strike price and expiry.
•Hold the position post the earnings announcements for a day or two based on
the implied volatility.
•Square off the original short position entered into.
S No Company Annual; Returns 2018 Annual Returns 2019
1 Bajaj Finance -79412.5 587.5
2 Larsen & Toubro 70812.5 50517.5
3 Tata Motors 133380 -84930
4 BPCL 11700 26010
5 Dr Reddy 7350 -79412.5
6 HDFC 11778 4695
7 Hero Motors 40695 -30915
8 Hindalco 53965 63210
9 Hindustan Unilever Limited 21120 1605
10 ICICI Bank -26400 1237.5
Total 244988 -47395
Table 4.1: Short Straddle Index & Annual PayoffShortStraddleIndex
20

38. 4.2. A Shift in price of underlying vs profitability
4.2 A Shift in price of underlying vs profitability
Short straddle by nature of the strategy will fetch losses when there is a high
volatility in the underlying.
In this test a trial is attempted to infer whether if a shift of more than 5% in
the underlying would result in a positive payoff from the strategy or vice versa.
The sample data used for this test can be found on the label on the left-hand
side which contains percentage shift in the underlying for each instance andchi-square_table
respective profit or loss.
Each instance in the table whose label can be found on the left-hand side haveCHIA
been counted using the excel formula which gave out those ordinal results.
The study proposes that a shift of more than 5% in either direction of the
underlying would fetch losses in case of short straddles.
Hypothesis 2: In the second hypothesis A test is conducted whether a shift
of more than 5% in the underlying would fetch losses when short straddle is
deployed.
Actual
Profitable Straddle Loss making Straddle Total
Shift of more than 5% in Underlying 3 14 17
Shift of less than 5% in Underlying 49 14 63
Total 52 28 80
Table 4.2: Actual Data for Chi-SquareCHIA
Expected
Profitable Straddle Loss making Straddle Total
Shift of more than 5% in Underlying 11.05 5.95 17
Shift of less than 5% in Underlying 40.95 22.05 63
Total 52 28 80
Table 4.3: Expected Data for Chi-SquareCHIE
Using
X2
=
(f0 − fe)2
fe
=
(3 − 11.05)2
11.05
+
(14 − 5.95)2
5.95
+
(49 − 40.95)2
40.95
+
(14 − 22.05)2
22.05
= 21.277
21

40. CHAPTER 5
Findings & Conclusions
sec:fifth
5.1 Findings
Short Straddle with Vega DecayPortfolio2018
The effect of deploying the strategy on the portfolio for the years 2018 & 2019
can be found in the labels mentioned on the left-hand side.
Portfolio2019
The strategy resulted in a CAGR of 9.434%
Result The yield obtained through the implementation of short straddle strategy,
based on events of earnings announcements, is greater to that obtained by
investing the same money in PNB Housing Finance.
AShift in price of underlying vs profitability
H0: A shift of more than 5% in the underlying does not necessarily result in
losses when short straddle is deployed.
H1: A shift of 5% in the underlying results in losses when short straddle is
deployed.
Probability Probability level at Alpha 0.001 = 10.827 at DOF=(2-1)*(2-1)=1
X2
= 21.277
Hence, Reject Null Hypothesis.
5.2 Conclusions
To conclude, the research proved that using the short straddle ATM strategy
in 2018 & 2019 gave better results than other investment avenues which are
traditional.The short straddle offered higher rates of return. Therefore, the
aim of the article has been achieved.The profit earned from the short straddle
in the year 2018 contrasted with a little loss made by the subsequent year.
Simply, selling options is much more efficient during a sideways trend. Taking
all the above into account, it must be stated that the research hypothesis has
been verified positively. With the study conducted it is evident that there is a
23

41. 5. Findings & Conclusions
huge potential in the Indian financial markets and novice traders can also make
higher returns by employing a strategy as as easy as a straddle and when done
right will be able to make higher returns than that of other investment avenues.
This article is a contribution to the knowledge about capital markets. The
basic aim of option strategies application is to hedge against risk. On the stock
market, due to the financial leverage offered by derivatives, they are often
the object of speculator interest. Moreover, options are particularly useful for
securing the value of stock portfolios. And more than 99.99% of the times a
shift of greater than 5% in the underlying will result in losses when a short
straddle is deployed.
24

42. Appendices

44. APPENDIX A
Important Definitions
sec:first-app
Back-testing:With reference to portfolio strategies, the applicationof a
strategy’s portfolio selection rules to historical data to assess what would have
been the strategy’s historical performance.
Liquidity: The ability to purchase or sell an asset quickly and easily at a price
close to fair market value. The ability to meet short-term obligations using
assets that are the most readily converted into cash.
Option: premium The amount of money a buyer pays and seller receives to
engage in an option transaction.
Open interest: The number of outstanding contracts in a clearinghouse at
any given time. The open interest figure changes daily as some parties open up
new positions, while other parties offset their old positions.
Underlying: An asset that trades in a market in which buyers and sellers
meet, decide on a price, and the seller then delivers the asset to the buyer and
receives payment. The underlying is the asset or other derivative on which a
particular derivative is based. The market for the underlying is also referred to
as the spot market.
Volatility: As used in option pricing, the standard deviation of the continuously
compounded returns on the underlying asset.
At the money (ATM): is a situation where an option’s strike price is
identical to the price of the underlying security. Both call and put options can
be simultaneously ATM.
27

46. APPENDIX B
Data Tables
sec:second-app
29

47. B. Data Tables
Portfolio2018
TableB.1:PortfolioPerformanceoftheyear2018(FiguresinRupees)
Company/QuarterQuarter1Quarter2Quarter3Quarter4
JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember
BajajFinance3475-25200-38262.5-19425
Larsen&Toubro8827.5114951633534155
TataMotors25650661201567525935
BPCL-185407290927013680
DrReddy-13962.5-2520065937.5-19425
HDFC2535-382515918-2850
HeroMotors-946517253162016815
Hindalco774016770255853870
HindustanUnileverLimited2325-7185177008280
ICICIBank6943.75-9006.25-9143.75-15193.75
Total(Monthly)-2158.7517687.50032983.750100104.25505300-15268.75611100
Total(Quarterly)15528.7532983.75150634.2545841.25
OpeningPortfoliocapitalMonthly1000000997841.251015528.751015528.751015528.751048512.51048512.51148616.751199146.751199146.7511838781244988
OpeningPortfoliocapitalQuarterly10000001015528.751048512.51199146.75
ClosingPortfolioBalanceMonthly997841.251015528.751015528.751015528.751048512.51048512.51148616.751199146.751199146.75118387812449881244988
ClosingPortfolioBalanceQuarterly1015528.751048512.51199146.751244988
30

48. Portfolio2019
TableB.2:PortfolioPerformanceoftheyear2019(FiguresinRupees)
Company/QuarterQuarter1Quarter2Quarter3Quarter4
JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember
BajajFinance7000-289501437.521100
Larsen&Toubro10230121011577.527500
TataMotors-855002194524510-45885
BPCL909630324013050
DrReddy3475-25200-38262.5-19425
HDFC54001410-59403825
HeroMotors-67354695-21150-7725
Hindalco14835103202236015695
HindustanUnileverLimited-1875-100529701515
ICICIBank-2543.75-1993.75-467510450
Total(Monthly)26311.25-8193504695-12633.750-23592.51966006955131450
Total(Quarterly)-55623.75-7938.75-3932.520100
OpeningPortfoliocapitalMonthly12449881271299.251189364.251189364.251194059.251181425.51181425.511578331177493117749311844481197593
OpeningPortfoliocapitalQuarterly12449881189364.251181425.51177493
ClosingPortfolioBalanceMonthly1271299.251189364.251189364.251194059.251181425.51181425.5115783311774931177493118444811975931197593
ClosingPortfolioBalanceQuarterly1189364.251181425.511774931197593
31

49. B. Data Tables
2018 2019
Company Quarter
Percentage
Change in
the
Underlying
Profit/Loss
Percentage
Change in
the
Underlying
Profit/Loss
BAJAJ
FINANCE
1 -2.33 3475 4.73 7000
2 4.97 -25200 9.94 -28950
3 9.34 -38262.5 -4 1437.5
4 9.28 -19425 -2.694 21100
BPCL 1 -2.22 -18540 -1.7 90
2 0.48 7290 2.13 9630
3 -0.36 9270 -0.11 3240
4 -0.36 13680 -4.03 13050
Dr Reddy 1 -7.9 -13962.5 0.53 3465
2 -3.24 -25200 -7.56 -25200
3 -0.24 65937.5 -5.35 -38262.5
4 5.95 -19425 0.52 -19425
HDFC 1 1.53 2535 -3.13 5400
2 3.066 -3825 1.73 1410
3 -2.56 15918 3.14 -5940
4 3.09 2850 2.47 3825
Hero Motors 1 -1.92 -9645 -0.73 -6735
2 -0.3 1725 -3.54 4695
3 0.91 31620 -8.45 -21150
4 0.043 16815 2.52 -7725
Hindalco 1 -3.76 7740 -3.66 14835
2 1.49 16770 0.55 10320
3 -2.05 25585 -0.11 22360
4 4.8 3870 -5.24 15695
HUL 1 -1.81 2325 -2.14 -1875
2 4.69 -7185 -3.17 -1005
3 -3.49 17700 2.55 2970
4 0.013 8280 0.47 1515
ICICI Bank 1 -1.99 6943.75 5.07 -2543.75
2 8.46 -9006.25 -3.8 -1993.75
3 7.59 -9143.75 4.9 -4675
4 9.2 -15193.75 0.09 10450
L&T 1 -0.1 8827.5 0.003 10230
2 0.1 11495 -0.02 1210
3 -0.0094 16335 -0.022 11577.5
4 0.6 34155 -0.0121 27500
Tata Motors 1 -2.162 25650 -15.54 -85500
2 -4.94 66120 -5.811 21945
3 -2.65 15675 -7.61 24510
4 1.24 25935 10.63 -45885
Table B.3: Table Contains percentage change in the underlying and respective
profit during that quarterchi-square_table
32

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