Derivatives Strategy for Volatile Markets

A Study on Derivatives in Volatile Market Condition

CONTENTS

SNO PARTICULARS

1 ABSTRACT

2 INTRODUCTION ABOUT COMPANY

3 INTRODUCTION ABOUT DERIVATIVES

3.1 ISSUES IN DERIVATIVES

3.2 SYSTEMATIS RISK

3.3 BASIC RISK

3.4 COUNTERPARTY RISK

4 FINANCIAL DERIVATIVES – DEFINITION

4.1 TYPES OF DERIVATIVES

4.2 FORWARD CONTRACTS

4.3 FUTURES CONTRACT

4.4 FUTURES TERMINOLOGY

4.5 PERMITTED LOT SIZES OF CONTRACT

4.6 OPTIONS CONTRACT

4.7 OPTIONS TERMINOLOGY

5 VOLATILE MARKET

6 CHARACTERISTICS OF VOLATILE MARKET

6.1 VOLATILITY IS CYCLICAL

6.2 VOLATILITY IS PERSISTENT

7 IDENTIFICATION OF VOLATILE MARKET

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8 TYPES OF SECURITIES

9 SCIENTIFIC METHOD INVOLVED IN IDENTIFYING SECURITY

9.1 AVERAGE RANGE

9.2 STANDARD DEVIATION

9.3 BETA COEFFICIENT

9.4 R- SQUARED

9.5 GEOMETRIC STANDARD DEVIATION

10 IDENTIFICATION OF SECURITIES

11 COMPARISON OF SECURITIES WITH THE MARKET

12 DERIVATIVE STRATEGY

12.1 STRADDLE

12.2 STRANGLE

12.3 BULL SPREAD WITH CALL OPTION

12.4 BEAR SPREAD WITH CALL OPTION

12.5 BULL SPREAD WITH PUT OPTION

12.6 BEAR SPREAD WITH PUT OPTION

12.7 BOX SPREAD

12.8 BUTTERFLY SPREAD WITH CALL OPTION

12.9 BUTTERFLY SPREAD WITH PUT OPTION

13 CALCULATION OF PAYOFF

14 CONCLUSION AND RECOMMENDATIONS

15 REFERENCES

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1. Abstract

The project began with the study of what derivative is and what are the types of
derivatives that has been trading in India and I was taught the basics of future and option
trading in India. After getting the basic knowledge about derivatives the project work
started with

• Identification of volatile market
• Identification of securities
- High volatile securities
- Low volatile securities



• Comparison of securities with the market
• Strategies for volatile market
• Payoff calculation for the strategies
• Propose the best strategy for the volatile market condition

2. PROFILE OF STOCK HOLDING COPORATION OF INDIA LTD

INTRODUCTION
Flagged off at the initiative of the Government of India, SHCILenjoys an enviable parentage that
includes leading Indian financial institutions and insurance majors like IDBI, UTI, ICICI, LIC
GIC and its subsidiaries, IFCI and IIBI. Their original focus was to manage the entire array of
post trade activities of Financial Institutions and Foreign Institutional Investors with dedicated
client relationship teams and state-of-the-art reporting systems.
It has been an eventful journey rewarding them with a 50% market share and the biggest
investing bodies of the country for clients.
From their inception to achieving and retaining the mantle of the largest Depository
Participant in the country, it is their dream and vision that has helped them. Where they have
made the difference is at understanding ideas, managing them, at arranging their organizational
strengths and translating these new exposures into service and business activities.
Their technological support not only holds enormous databases together, but makes sense
and searvice out of it too. The State-of-the-art Information Technology tools deployed by SHCIL


is a laureate of lthe computerworld Honors Program. SHCIL has also received National IT award
from the Computer Society of India.
Their adaptability to the changing requirement of the market is one of their main
strengths. The biggest changeover in the SHCIL story has been expansion and diversification.
Year 1996 marked a fundamental shift for the Indian capital markets. The Depository Act
changed the way the capital market, specifically the stock exchanges, investors and related
organization would function. Securities Exchange Board of India with its guiding Hand, set up a
framework for changing over capital market investing and trading from paper to electronic mode.
The depository culture has accelerated since then, probably unmatched by any other country.
Accordingly, from servicing financial institutions, they have timed their move into the extensive
individual investro populace. They have enriched their organisatinal strengths and fine-tuned the
front-end interfaces to cater to the distinct needs of the individual investor. A specially trained
pool of over 1500 professionals provides personalised service to their client investors. To enable
easy reach, they have accelerated their distribution network from four offices in 1997 to over 100
offices across the country. Dedicated leaseline network links across these offices, independent
systems setups and off-site backups provide the platform for traditional servicing as also for new
e-commerce applications. The results are definite. Four years back, they signed in their first
individual investor client. Today, SHCIL serves a satisfied clientele of around seven lakh
accounts.
They ensure that their financial product offerings are related closely, not just disjointed services
added on. Alongside expansion, the thinking has been at diversifying further into areas of
financial products and services. Their new products are an echo of market requirements, customer
feedback and needs. Rather than coming out with products which would suit their organisational
needs, the accent is on channeling technology to make convenience products for financial
markets. They formulate new products that give quantum benefits to linvestors, corporatins and
brokers and also fit into the mosaic of their product mix.
Glolbalisation of the market has led to a manifold increase in investment. New markets have
been opened new instruments have been developed and new services have been launched.
Besides, a number of opportunities and challenges have also been thrown open. Stock Holding
Corporation of India Ltd.,(SHCIL), the premier custodian of Indian capital market providing
services of international standards, is gearing up to reposition itself in the changed scenario. With
world – acclaimed automation and a team of committed professionals, SHCILis confident of
scalilng new heights.



INTRODUCTION TO THE COMPANY

Stock Holding Corporation of India Ltd. (SHCIL) was incorporated under the Companies act
1956 at the initiative of the Government of India. It is promoted by the all India financial and
investment institutions and insurance companies viz., IDBI, UTI, ICICI, IFCI, IBI, LIC, GIC, and
its subsidiaries.
SHCIL commenced operations in August 1988 and has been providing custodial and
related services of international standards for nearly a decade to the promoter and other
institution, Foreign Instiutional Investors (Flls), Commercial Banks and Mutual Funds. Being a
premier custodian of the country. SHCIL today holds more than Rs. 80,000 crores worth of
clients assets. The turnover of the corporation exceeds Rs.10,000 crores per annum. SHCIL has
been earning profit and declaring dividend right from the inception. SHCIL already has securities
worth Rs.26000 crores in electronic form.
SHCIL is the first depository participant to be registered with the National Securities Depository
Ltd.(NSDL). SHCIL offers the facility of operating beneficiary account for individuals and
corporates as well as clearing account for brokers.
This manual has been prepared exclusively for their account holder. It gives the
overview of the depository system and explains in details, various operation relating to individual
accounts. The aim is to impart to their account holders, knowledge about the working of
depository system and facilitate a smooth transition from physical to electronic tradings.

BRANCHES:
SHCIL has a network of more than 120 branches spread across the country providing services at
doorstep to their client with Head Office at Mumbai. In Karnataka there are 12 branches spread
over the entire region.

MISSION
“To spread quality services through the innovative use of technology”

OBJECTIVES OF THE SHCIL

1. To eliminate paperwork and bring in front of electronic stock market (E-Stock
Market) on India
2. To ensure satisfaction through teamwork and professional management.



3. To extend effective guidance to brokers, to clearing house Corporation,
companies and investor in E-Stock Trading
4. To provide good quality of services on a continuous basis to the satisfaction of
clients
5. To encourage every one in the organization to upgrade and enhance there skills
and knowledge in computerized environment.
6. To attain specified level of performance every year and ensure compliance with
statutory requirements.

PRODUCTS AND SERVICES

SERVICES:

CUSTODIAL SERVICES
Since its commencement in 1988 as the premier Custodian in the country, SHCIL has
been providing Custodial Services of international standards to Financial Institutions, Foreign
Institutional Investors and Domestic Mutual Funds.
With almost 70% of the Institutional business to its credit, SHCIL has graduated to providing
specialised services to large investing institutions.
A dedicated pool of trained professionals working in interconnected offices across the country,
linked to client institutions, Stock Exchanges, Depositories and brokers through state-of-the-art
telecommunication channels, is at the helm of SHCIL's Custodial services

Lodgements and Custodial Services
SHCIL has specialized sections catering to all activities (lodgment, objections handling, follow-
ups, client reporting etc.) associated with the Lodgment of securities with the respective company
and ensuring their quick transfer to the purchaser.
On receipt of the transferred securities, securities are held in state-of-the-art, high-security vaults
on behalf of the clients. A pioneer in introducing the bar-coding system to track certificates,
SHCIL ensures the availability of each and every share certificate at a moments notice

Corporate Actions
The Corporate Actions cell ensures timely collection of monetary and non-monetary benefits on
behalf of the client. It covers all activities relating to Corporate Actions like calculation of


entitlements, receipt of monetary Corporate Actions and transfer of the same to clients.
Customized reporting to clients on the status of Corporate Actions is done periodically.

The Primary Markets cell takes care of applications on behalf of clients for primary market
issues, calculates the entitlements, follows up for allotment or refunds and sends customised
reports to clients.

Data Bank Services
To serve clients, the Corporation requires a large amount of information from the Stock
Exchanges, Depositories, SEBI, Companies and other entities of the capital market. The
Databank department collects, compiles and maintains information that is required by the
Corporation for carrying out market obligations. Databank maintains information of
approximately 12,500 instruments, 8500 companies, 2500 Registrars, two Depositories and six
Stock Exchanges namely BSE, NSE, OTCEI, DSE, CSE and MSE.

Databank also maintains the following data :
a. Information regarding various scrips ( listed and unlisted) in which our clients have
holdings.

b. Information pertaining to book closures / record dates for corporate events, ex-dates
and no delivery schedules for various Stock Exchanges.
c. Details of monetary and non-monetary benefits.
d. In the electronic segment, information such as ISIN data, the Registrars handling demat for a
company, the scrips under compulsory demat trades as declared by SEBI, scrips included in
compulsory rolling segment etc. are also maintained.
e. NAV information of all Mutual Fund schemes

Reporting - Custodial Services
The Client Interface Cell is a single point contact for all Client Issues.
Detailed, reconciled statements and customized reports are made available to clients periodically
or as and when desired by the clients.

Street Name Securities


This is a special service offered to clients who wish to turn around their portfolio in a speedy
manner. The securities purchased by the clients are not sent for registration, but are stored in the
safe deposit vaults of the Corporation. Adequate measures are taken to ensure no benefit losses
due to corporate events or any document expirations.

DEPOSITORY PARTICIPANT SERVICES
Introduction:
Their Depository Participant services addresses individual investment needs. With a parentage of
leading financial institutions and insurance majors and a proven track record in the Custodian
business, they have reiterated their past success by establishing themselves as the first ever and
largest Depository Participant in India
From a tentative foray in 1998 into the individual investor arena to servicing around seven lakh
accounts, the have endeavored to constantly add and innovate to make business a pleasure for
their client.
Over 100 of our networked branches ensure they are available where their client look out.
Across the country, fourteen Depository Participant Machines (DPMs) connected to NSDL and
seven connected to CDSL ensure fast and direct processing of clients instructions.
Their customer-centric account schemes have been designed keeping in mind the investment
psyche of their clients. A DP account with SHCIL takes care of client’s Depository needs like
dematerialisation, rematerialisation and pledging of shares.
.
At SHCIL, they place a very high premium on client reporting. Periodic statements sent to client
keep them informed of their account status. Dedicated Customer Care lines manned by trained
staff answer client’s queries on demat / trades / holdings. The latest in client response at SHCIL is
Interactive Voice Response (IVR) system for round the clock information on their account.
Registration on theirr website, SHCIL Interactive, enables them to check their account-related
information, stock market reports and statistics, Corporate benefits declared by companies,
realtime quotes of scrips on BSE and NSE and so much more online.

Demat
Dematerialisation is the process of conversion of shares from physical form to the electronic
mode. Their dedicated demat team enable the client to convert their physical holdings into
electronic mode in a quick and hassle-free manner.
As per SEBI, scrips can be divided as :



• Scrips eligible for demat.
These scrips can be traded either in physical or electronic form
• Scrips falling under compulsory demat.

• Scrips can be traded only in electronic form.

• Scrips falling under transfer cum demat.
In this category, the shares purchased by the client in the physical form can be sent to the
Registrar / Company for transfer and dematerialisation at the same time.

Process for Dematerialization / Rematerialization
Once demat account of client is opened with SHCIL and have received their client identity
number, they can start dematerialising their shares. They can submit the shares over the counter at
any of their branches.
When the company gives credit, those shares will reflect under "free" column in the Client ID.
Now client can sell these shares. In case the company is not satisfied with the details furnished, it
will reject the shares
If the company has rejected Client’s shares, SHCIL will forward the shares to Client on receiving
them from the company.

CLEARING- MEMBERS SERVICES

Introduction
SHCIL's long-standing association with Clearing Members has enabled it to develop services
based on an understanding of their working and their requirement for timely and accurate
information

SHCIL accept deposits of base capital and Additional base capital requirements stipulated by
NSE for clearing members trading on its capital market segment. Besides, their new products
with a broker empanelment clause ensure a mutually beneficial tie-up. Clearing members stand to
earn a steady income from their product transactions and this adds to their client-base, while they
capitalize on their rapport with the market


SHCIL currently offer Depository services to more than 680 clearing members of various
exchanges connected with NSDL and CDSL.

Custodial Services for CM
Custodial services for Base Capital / Additional Capital requirements
They accept deposits of Base Minimum Capital (Base Capital) and Additional Base Capital as
stipulated by NSE for clearing members to be able to trade on its capital market segment.
The securities being deposited shall be subject to legal and beneficial ownership of:
 TM clearing member / spouse in case of individuals.
 Any of the partners / their spouses in case of partnership
 Any of the directors in case of corporate TM clearing member.

NRI SERVICES
Over the years, SHCIL has grown to become a major player in the capital market. With a
network of more than 120 offices operating across the country and franchisees operating
abroad, SHCIL provides Depository Participant and related services close to 0.7 million
satisfied investors out of which over 6000 are NRI Clientele.
SHCIL has a full-fledged NRI cell operating specifically to cater needs pertaining to
Depository account opening and maintenance. NRI cell co-ordinates with prospective NRI
customers, collects and assists in obtaining the relevant documents and ensures the Depository
Account is opened hassle free.
NRI Cell collects physical certificates to be sent for demat and ensures that the certificates are
in order and can be sent for dematerialization under the existing guidelines issued by the
depositories. Instructions for trade are accepted by fax on request by NRI Cell to ensure timely
settlement of trades. In this case later on the client needs to regularize by sending the original
trade delivery instruction. NRI Cell addresses any tariff and billing related query.
In short NRI Cell is a single point contact for any matter relating to NRI Depository
operations.

PRODUCTS:



ADD Shares

This is a product by which SHCIL arranges loans against demat shares for its clients at the
competitive interest rates. They can use the shares in their free account as a collateral and take
a loan from any of their empanelled banks. SHCIL complete documentation and processing and
give the cheques within 48 hours of application to their clients.

Features
 Loan against demat shares held in the DP account with SHCIL
 SHCIL processes the entire paperwork required with the bank.
 The service is available at any of over 100 branches of SHCIL.

CASH –ON-PAYOUT

Usually client need to follow-up with their broker for the funds after they have sold their
securities. When they sell through Cash-on-Payout, they give client a cheque on the next day of
payout.
Cash-on Payout is a variant of Sell-n-Cash and it comes in handy when you don't need immediate
payment but at the same time are looking for an timely payment without delays.
Cash on Payout has a very competitive service charge which may actually be lesser than what
client is currently paying your broker.

FUND INVEST
Fund Invest is a basket of financial products, ranging from fixed income securities like Fixed
deposits, Infrastructure bonds and Capital Gain Bonds to variable income securities like Initial
Public Offers (IPOs) of Equities and Mutual Funds. This is a financial product that caters to the
various investment needs of their clients. SHCIL is an AMFI Registered Mutual Fund Advisor
(ARMFA).

Features
• At present, they are distributing more than 25 schemes of different Mutual Funds



• Capital Gains Bonds come under 54 EC Capital Gains Bonds, where investors get
exemption from Capital Gain tax. These are 'on -tap ' issues. At present, SHCIL is
distributing Capital Gain Bonds of Rural Electrification Corporation, National Housing
Bank, Small Industries Development Bank of India and National Highway Authority of
India. Infrastructure Bonds are issued by ICICI Bank and IDBI, with Section 88 as the
main feature.
• Private Placements: Stock Holding distributes Debt papers issued for Private Placement
with Structural Obligations by the State and Central Government, typically targeted for
Trusts and Provident Funds.
• Fixed Deposits: SHCIL distribute fixed Deposits with high investment rating and issued
by blue- chip corporate. These papers generally offer 50 to 100 basis points more than
bank fixed deposits of comparable period. At present, SHCIL are distributing IDBI
Suvidha Fixed Deposits and HDFC Fixed Deposits.
• Initial Public Offer: IPOs offered from blue chip corporate can be subscribed from
Stock Holding. Issues recently distributed by SHCIL are NDTV, Maruti Udyog,
Datamatics Solutions, ONGC etc..

GOI BONDS
RBI on behalf of Government of India issues Savings Bonds in two different series.
• 6.5% tax free bonds
• 8.0% taxable bonds

These Bonds are held in electronic form in an account called Bond Ledger Account (BLA).
Bond Ledger Accounts can be opened and operated with RBI designated receiving Offices. RBI
has designated SHCIL as one of the Receiving Offices for this purpose. Savings Bonds being
sovereign in nature are absolutely safe and an attractive investment option in the current
volatile market situation.

STOCK DIRECT
STOCK direct - India's first online trading platform was launched in 1999. Today STOCK
direct is the most secure online trading platform which combines encryption technology /
digital signature as well as Smart Card security features.


Client can trade from home on the Internet with a floppy containing the STOCK direct
software.
For people who are not inclined to trading on the net, SHCIL has Request Transmitting
Machines (RTMs) placed at specified SHCIL centers. This is an electronic touch screen kiosk
where you can insert your smart card and trade effortlessly.

STOCK LENDING
SHCIL has been granted the approval to act as Approved Intermediary by SEBI in
April, 1998. If client is the lender, client retain all the benefits of ownership other than voting
rights. Through Stock lending, your holdings that SHCIL manage, can be temporarily
transferred to a third party to earn a fixed income for client.

As a borrower, a person can utilize borrowed securities the way he want provided he return the
securities along with the accrued benefits at the end of the loan period. Securities deposited
with SHCIL by the investors for lending will not be treated as sale and hence will not attract
any capital gains tax. The interest income received will be taxed like any other income. Flexible
period of borrowing is available from 4 days to 84 days. Securities deposited with SHCIL for
lending will not attract any custody charges during the period the securities are lent.
But this year the lending license of SHCIL is not renewed by the SEBI.

2. Introduction about derivatives

The technical definition is 'a financial contract the value of which is derived from
the value of another (underlying) asset, such as an equity, bond or commodity.'

Derivatives have been around for a long time, though without stirring much
controversy. Forward contracts were used by Flemish traders in the 12th century.


Contracts resembling today's futures and options were widely used in the 17th century in
Amsterdam, when it was the financial capital of the western world, and at about the same
time in Osaka's rice market.

Organized commodity-futures exchanges were set up in Chicago and New York
in the middle of the 19th century. 'Complex' financial instruments are nothing new either.

In a quarter of a century the global financial marketplace has undergone a
transformation equivalent to replacing a village shop with a shopping mall. In 1986 the
total outstanding value of derivatives markets was just over $ 1 trillion; in 1994 it was $
20 trillion

Derivatives have flourished because a series of recent developments have
transformed them into a cheap and efficient way of moving risk about within the
economic system. After the collapse of the Bretton Woods fixed-exchange-rate regime in
the early 1970s, floating exchange rates fuelled demand for ways to cope with the
resulting currency risk. This led to the development of exchange-traded foreign-exchange
futures in Chicago, a successful innovation that was to spawn many more. The
availability of large, low-cost computing capacity was also vital, as pricing some
derivatives involves complex number-crunching.

Issues in derivatives

The three separate issues in derivatives are as follows:

• How well the buyer understands what the derivative does;
• What the derivative is being used for
• What risks are inherent in the derivative itself?



The first two questions are really about the qualities of the buyer rather than of the
product. Many so-called derivatives disasters are in fact speculative disasters that might
just as easily have happened if the investor had been punting in shares or equity.

Of the risks associated with derivatives themselves, the one that gets the most
headlines is

Systemic risk

The possibility that loss on a derivative contract might cause a bank to go bust,
producing knock-on effects throughout the global financial system. This has given
nightmares to financial regulators around the world. To improve the quality of their sleep,
they have already demanded fuller disclosure of banks' derivative activities and required
them to put aside capital to cover potential losses. Further controls are in the pipeline.
Derivatives, however, are by no means the only source of systemic risk. Fears of
systemic collapse have also been raised recently by the third-world debt crisis and by the
collapse of the developed world's commercial-property market. Moreover, although some
critics have blamed derivatives for increasing volatility in financial markets (and, among
other things, causing the 1987 stock market crash), most investigations into such claims
have exonerated them. Indeed, it now looks more likely that it was the volatility in
financial markets that boosted demand for derivatives, and that by reducing that volatility
they actually lessened systemic risk.

Non-financial firms need to watch out for three main risks when using derivatives. They
are as follows



3.3 Market risk

The possibility that the value of the derivative will change. This is essentially no
different from the risk involved in buying an equity or bond, or holding a currency -
except that the market risk may be magnified many times if the derivative is leveraged;
indeed some of the most famous disasters, including Procter & Gamble's losses, were
associated with leveraged products.
The other difference compared with equities, bonds and so on is that the value of
an option changes increasingly quickly as it becomes more likely to be exercised.

Basis risk

The derivative used may not be a perfect match with whatever it is intended to
hedge, so that when the value of the underlying asset falls, the value of the derivative
may not raise by the expected amount.

Credit or 'Counterparty' risk:

The institution concerned will get into trouble and be unable to pay up. Bear in
mind, however, that the credit risk on buying a derivative is less than that on, say, making
a loan, as the cost of replacing a derivative contract is only the amount to which the
market has moved against the buyer since the original contract was drawn up, whereas
for the loan it is the entire amount lent.

Derivatives bought from banks are exposed to bigger credit risks than those
bought from exchange. This is because exchanges guarantee contracts, and, unlike banks,
ensure they can cover them by requiring traders to stump up cash ('post-margin') to cover


potential losses in advance. However, this increases the possibility that a firm might face
liquidity problems.

If there is any doubt about the financial strength of the firm selling a derivative,
the best advice is to leave well alone. Derivatives have brought a neat twist to the
relationship between firms and their banks. Increasingly companies, used to having their
quality as clients investigated by their banks, are instead sitting in judgment over their
banks.

3. Financial Derivatives – Definition



Financial derivative is a financial instrument whose pay-offs depends on a more
primitive or fundamental good. For example a gold futures contract is a derivative
instrument, because the value of the future contract depends on the value of the gold that
underlies the futures contract. The value of the gold is the key since the value of the gold
future contract derives from the value of underlying gold.

Types of derivatives

• Forward
• Futures
• Options
• Swaps

Forward contract

A forward contract is an agreement between two parties that commits one to sell
and the other to buy a stipulated quantity and grade of a commodity, currency, security,
index or other specified item at a set price on or before a given date in the future.

Futures contract

It involves an obligation on both the parties (i.e.) the buyer and the seller to fulfill
the terms of the contract (i.e.) these are predetermined contracts entered today for a date
in future.



Futures terminology

• Spot price: The price at which an asset trades in the spot market.

• Futures price: The price at which the futures contract trades in the futures market.

• Contract cycle: The period over which a contract trades. The index futures
contracts on the NSE have one-month, two-months and three-month expiry cycles
which expire on the last Thursday of the month. Thus a January expiration
contract expires on the last Thursday of January and a February expiration
contract ceases trading on the last Thursday of February. On the Friday following
the last Thursday, a new contract having a three-month expiry is introduced for
trading.

• Expiry date: It is the date specified in the futures contract. This is the last day on
which the contract will be traded, at the end of which it will cease to exist.

• Basis: In the context of financial futures, basis can be defined as the futures price
minus the spot price. There will be a different basis for each delivery month for
each contract. In a normal market, basis will be positive. This reflects that futures
prices normally exceed spot prices.

• Cost of carry: The relationship between futures prices and spot prices can be
summarized in terms of what is known as the cost of carry. This measures the
storage cost plus the interest that is paid to finance the asset less the income
earned on the asset.

• Initial margin: The amount that must be deposited in the margin account at the
time a futures contract is first entered into is known as initial margin.



• Marking-to-market: In the futures market, at the end of each trading day, the
margin account is adjusted to reflect the investor’s gain or loss depending upon
the futures closing price. This is called marking–to–market.

• Maintenance margin: This is somewhat lower than the initial margin. This is set to
ensure that the balance in the margin account never becomes negative. If the
balance in the margin account falls below the maintenance margin, the investor
receives a margin call and is expected to top up the margin account to the initial
margin level before trading commences on the next day.

• Contract size: The amount of asset that has to be delivered under one contract. For
instance, the contract size on NSE’s futures market is 200 Nifties.

Permitted Lot Sizes of Contracts



Market
No. Underlying Symbol
Lot
1 S&P CNX Nifty NIFTY 200
2 CNX IT CNXIT 100
Derivatives on Individual Securities
1 Associated Cement Co. Ltd. ACC 1500
2 Andhra Bank ANDHRABANK 4600
3 Arvind Mills Ltd. ARVINDMILL 4300
4 Bajaj Auto Ltd. BAJAJAUTO 400
5 Bank of Baroda BANKBARODA 1400
6 Bank of India BANKINDIA 3800
7 Bharat Electronics Ltd. BEL 550
8 Bharat Heavy Electricals Ltd. BHEL 600
9 Bharat Petroleum Corporation Ltd. BPCL 550
10 Canara Bank CANBK 1600
11 Cipla Ltd. CIPLA 1000
12 Dr. Reddy's Laboratories Ltd. DRREDDY 200
13 GAIL (India) Ltd. GAIL 1500
14 Grasim Industries Ltd. GRASIM 350
15 Gujarat Ambuja Cement Ltd. GUJAMBCEM 1100
16 HCL Technologies Ltd. HCLTECH 1300
Housing Development Finance
17 HDFC 600
Corporation Ltd.

18 HDFC Bank Ltd. HDFCBANK 800
19 Hero Honda Motors Ltd. HEROHONDA 400
20 Hindalco Industries Ltd. HINDALC0 300
21 Hindustan Lever Ltd. HINDLEVER 2000
Hindustan Petroleum Corporation
22 HINDPETRO 650
Ltd.

23 ICICI Bank Ltd. ICICIBANK 1400
24 I-FLEX Solutions Ltd. I-FLEX 300



25 Infosys Technologies Ltd. INFOSYSTCH 200
26 Indian Petrochemicals Corpn. Ltd. IPCL 1100
27 Indian Oil Corporation Ltd. IOC 600
28 ITC Ltd. ITC 300
29 Jet Airways (India) Ltd. JETAIRWAYS 200
30 Mahindra & Mahindra Ltd. M&M 625
31 Maruti Udyog Ltd. MARUTI 400
32 Mastek Ltd. MASTEK 1600
33 Mahanagar Telephone Nigam Ltd. MTNL 1600
34 National Aluminium Co. Ltd. NATIONALUM 1150
National Thermal Power
35 NTPC 3250
Corporation Ltd.

36 Oil & Natural Gas Corp. Ltd. ONGC 300
37 Oriental Bank of Commerce ORIENTBANK 1200
38 Punjab National Bank PNB 1200
39 Polaris Software Lab Ltd. POLARIS 1400
40 Ranbaxy Laboratories Ltd. RANBAXY 400
41 Reliance Energy Ltd. REL 550
42 Reliance Industries Ltd. RELIANCE 600
43 Satyam Computer Services Ltd. SATYAMCOMP 1200
44 State Bank of India SBIN 500
45 Shipping Corporation of India Ltd. SCI 1600
46 Syndicate Bank SYNDIBANK 7600
47 Tata Consultancy Services Ltd TCS 250
48 Tata Power Co. Ltd. TATAPOWER 800
49 Tata Tea Ltd. TATATEA 550
50 Tata Motors Ltd. TATAMOTORS 825
51 Tata Iron and Steel Co. Ltd. TISCO 1350
52 Union Bank of India UNIONBANK 4200
53 Wipro Ltd. WIPRO 600



Options contract

It is a contract that goes a step further and provides the buyer of the option a right
without any obligation to fulfill the terms of the contract.

Key features of an options contract

• Gives right to buy or sell
• It is not an obligation
• Consideration is by paying a premium
• Quantity is defined

Option terminology

• Index options: These options have the index as the underlying. Some options are
European while others are American. Like index futures contracts, index options
contracts are also cash settled.

• Stock options: Stock options are options on individual stocks. A contract gives the
holder the right to buy or sell shares at the specified price.

• Buyer of an option: The buyer of an option is the one who by paying the option
premium buys the right but not the obligation to exercise his option on the
seller/writer.

• Writer of an option: The writer of a call/put option is the one who receives the
option premium and is thereby obliged to sell/buy the asset if the buyer exercises
on him.


• Call option: A call option gives the holder the right but not the obligation to buy
an asset by a certain date for a certain price.

• Put option: A put option gives the holder the right but not the obligation to sell an
asset by a certain date for a certain price.

• In-the-money option: An in-the-money (ITM) option is an option that would lead
to a positive Cash flow to the holder if it were exercised immediately. A call
option on the index is said to be in-the-money when the current index stands at a
level higher than the strike price (i.e. spot price > strike price). If the index is
much higher than the strike price, the call is said to be deep ITM. In the case of a
put, the put is ITM if the index is below the strike price.

• At-the-money option: An at-the-money (ATM) option is an option that would
lead to zero cash flow if it were exercised immediately. An option on the index is
at-the-money when the current index equals the strike price (i.e. spot price =
strike price).

• Out-of-the-money option: An out-of-the-money (OTM) option is an option that
would lead to a negative cash flow. A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price
(i.e. spot price < strike price). If the index is much lower than the strike price, the
call is said to be deep OTM. In the case of a put, the put is OTM if the index is
above the strike price.

4. Volatile markets



Volatile markets are characterized by wide price fluctuations and considerable
trading volume.

Reason for volatile market condition

Few reasons for market volatility are:

• Change in interest rate policy.

• Arbitrage causes volatility. Arbitrage is the simultaneous or almost simultaneous
buying and selling of an asset to profit from price discrepancies. Arbitrage causes
markets to adjust prices quickly. This has the effect of causing information to be
more quickly assimilated into market prices. This is a curious result because
arbitrage requires no more information than the existence of a price discrepancy.

• Another obvious reason for market volatility is dissemination of information and
technology factors. This includes more timely information dissemination,
improved technology to make trades and more kinds of financial instruments. The
faster information is disseminated, the quicker markets can react to both negative
and positive news. Improved trading technology makes it easier to take advantage
of arbitrage opportunities, and the resulting price alignment arbitrage causes.

• Finally, more kinds of financial instruments allow investors more opportunity to
move their money to more kinds of investment positions when conditions change.

• Most people would say that new information in general causes volatility

5. Characteristics of high volatile market



Volatility has certain characteristics. They are as follows

• Cyclical
• Persistency
• Mean reversion.

Volatility is cyclical

Volatility tends to run in cycles, increasing and peaking out, then decreasing until
it bottoms out and begins the process all over again. Many traders believe volatility is
more predictable than price (because of this cyclical characteristic) and have developed
models to capitalize on this phenomenon.

Volatility is persistent

Persistency is simply the ability of volatility to follow through from one day to the
next, suggesting the volatility that exists today will likely to exist tomorrow. That is, if
the market is highly volatile today, it will most likely be volatile tomorrow; conversely, if
the market not volatile today it will likely not be volatile tomorrow. By the same token, if
volatility is increasing today, it will likely continue to increase tomorrow, and if volatility
is decreasing today, it will likely continue to decrease tomorrow.

6. Identification of volatile market



The market is highly volatile for the month of January & February in the year
2005, so I had taken these periods as a highly volatile market for my study. The details of
indices for the period are as follows.

JANUARY INDEX MOVEMENTS

Date Open High Low Close
3-Jan-05 2080 2118.6 2080 2115
4-Jan-05 2116.95 2120.15 2100.55 2103.75
5-Jan-05 2103.75 2105.1 1990.15 2032.2
6-Jan-05 2031.55 2035.65 1984.25 1998.35
7-Jan-05 1998.25 2021.45 1992.55 2015.5
10-Jan-05 2016.75 2025.9 1974.8 1982
11-Jan-05 1982.7 1988.9 1947.35 1952.05
12-Jan-05 1953.6 1966.65 1900.85 1913.6
13-Jan-05 1922.5 1963.4 1916.95 1954.55
14-Jan-05 1954.9 1961.4 1922.85 1931.1
17-Jan-05 1931.75 1944.55 1902.45 1932.9
18-Jan-05 1933.05 1956.95 1925.35 1934.05
19-Jan-05 1934.1 1945.65 1922.35 1926.65
20-Jan-05 1928.1 1940.95 1900.05 1925.3
24-Jan-05 1925.3 1932.75 1902.9 1909
25-Jan-05 1908.85 1934.25 1894.4 1931.85
27-Jan-05 1931.9 1961.75 1929 1955
28-Jan-05 1955.25 2014.25 1950.85 2008.3
31-Jan-05 2008.45 2060.4 2006.35 2057.6

On these above dates the market is highly volatile on January 31st

Market movements in the month of January



2135
2110
2085
2060
market movements

2035
2010
1985
1960
1935
1910
1885
1860
4-Jan-05

7-Jan-05
5-Jan-05
6-Jan-05

10-Jan-05
11-Jan-05

13-Jan-05
14-Jan-05

19-Jan-05

27-Jan-05
28-Jan-05
12-Jan-05

17-Jan-05
18-Jan-05

20-Jan-05
24-Jan-05
25-Jan-05

31-Jan-05
date

Market movement on January 31st

31-Jan-05

2080
2060
2040
2020 31-Jan-05
2000
1980
1960
1 2 3 4

February index movements



Date Open High Low Close
1-Feb-05 2057.75 2072.5 2045.25 2059.85
2-Feb-05 2062.15 2074.5 2045.5 2052.25
3-Feb-05 2052.35 2083.75 2052.35 2079.45
4-Feb-05 2079.4 2099.2 2060.8 2077.95
7-Feb-05 2097.45 2098 2049.85 2055.1
8-Feb-05 2055 2065 2043.6 2055.15
9-Feb-05 2055.2 2077.7 2055.2 2070
10-Feb-05 2070.1 2075.1 2049.85 2063.35
11-Feb-05 2063.35 2084.5 2063.35 2082.05
14-Feb-05 2083.05 2110.15 2083.05 2098.25
15-Feb-05 2098.25 2101.6 2081.2 2089.95
16-Feb-05 2090 2103.4 2059.45 2068.8
17-Feb-05 2069.1 2069.15 2045.85 2061.9
18-Feb-05 2062.45 2076.7 2048.85 2055.55
21-Feb-05 2055.15 2065.75 2039.9 2043.2
22-Feb-05 2043.4 2061.65 2036.6 2058.4
23-Feb-05 2058.7 2065.15 2051.35 2057.1
24-Feb-05 2057.75 2070.5 2052.4 2055.3
25-Feb-05 2057.3 2081.85 2051.2 2060.9
28-Feb-05 2061.2 2106.2 2047.7 2103.25



Identification of volatile market

Difference
Difference between Difference
between Open Open and between
Date Open High and High Percentage Low Low High and Low Close
2057.
1-02-05 75 2072.5 14.75 0.712% 2045.25 -12.5 -27.25 2059.9
2062.
2-02-05 15 2074.5 12.35 0.595% 2045.5 -16.65 -29 2052.3
2052.
3-02-05 35 2083.75 31.4 1.507% 2052.35 0 -31.4 2079.5
2079.
4-02-05 4 2099.2 19.8 0.943% 2060.8 -18.6 -38.4 2078
2097.
7-02-05 45 2098 0.55 0.026% 2049.85 -47.6 -48.15 2055.1

8-02-05 2055 2065 10 0.484% 2043.6 -11.4 -21.4 2055.2
2055.
9-02-05 2 2077.7 22.5 1.083% 2055.2 0 -22.5 2070
10-02- 2070.
05 1 2075.1 5 0.241% 2049.85 -20.25 -25.25 2063.4
11-02- 2063.
05 35 2084.5 21.15 1.015% 2063.35 0 -21.15 2082.1
14-02- 2083.
05 05 2110.15 27.1 1.284% 2083.05 0 -27.1 2098.3
15-02- 2098.
05 25 2101.6 3.35 0.159% 2081.2 -17.05 -20.4 2090
16-02-
05 2090 2103.4 13.4 0.63% 2059.5 -30.55 -44 2069
17-02- 2069.
05 1 2069.15 0.05 0.002% 2045.85 -23.25 -23.3 2061.9
18-02- 2062.
05 45 2076.7 14.25 0.686% 2048.85 -13.6 -27.85 2055.6
21-02- 2055.
05 15 2065.75 10.6 0.513% 2039.9 -15.25 -25.85 2043.2
22-02- 2043.
05 4 2061.65 18.25 0.885% 2036.6 -6.8 -25.05 2058.4
23-02- 2058.
05 7 2065.15 6.45 0.312% 2051.35 -7.35 -13.8 2057.1
24-02- 2057.
05 75 2070.5 12.75 0.616% 2052.4 -5.35 -18.1 2055.3

Babasabpatilfreepptmba.com


25-02-05 2057.3 2081.85 24.55 1.179% 2051.2 -6.1 -30.65 2060.9

28-02-05 2061.2 2106.2 45 2.13% 2047.7 -13.5 -58.5 2103

op- hi - low-
Date close %ge close close
1-02-05 2.1 0.102% -12.65 14.6
2-02-05 -9.9 -0.482% -22.25 6.75
3-02-05 27.1 1.303% -4.3 27.1
4-02-05 -1.45 -0.070% -21.25 17.15
7-02-05 -42.35 -2.061% -42.9 5.25
8-02-05 0.15 0.007% -9.85 11.55
9-02-05 14.8 0.715% -7.7 14.8
10-02-
05 -6.75 -0.327% -11.75 13.5
11-02-
05 18.7 0.898% -2.45 18.7
14-02-
05 15.2 0.724% -11.9 15.2
15-02-
05 -8.3 -0.397% -11.65 8.75
16-02- -
05 -21.2 1.025% -34.6 9.35
17-02-
05 -7.2 -0.349% -7.25 16.05
18-02-
05 -6.9 -0.336% -21.15 6.7
21-02-
05 -11.95 -0.585% -22.55 3.3
22-02-
05 15 0.729% -3.25 21.8
23-02-
05 -1.6 -0.078% -8.05 5.75



24-02-
05 -2.45 -0.119% -15.2 2.9
25-02-
05 3.6 0.175% -20.95 9.7
28-02-
05 42.05 1.999% -2.95 55.55

Market movements in the month of February

Market Movements
2120

2110

2100

2090

2080

2070
Nifty

2060

2050

2040

2030

2020
2/2 5

2/5 5
2/6 5
2/7 5
2/8 5

2/1 5
/05

2/4 5

2/9 5

2/1 05
2/1 05
2/1 05
2/1 05

2/1 05
2/1 05

2/2 05
2/2 05

2/2 05
2/2 05
5
2/1 5

2/1 5
2/1 05

2/2 05
2/2 05
2/2 05

2/2 5
2/2 05
/0

/0
/0
/0
/0

/0
/0

/0

8/0
0/0

5/0

4/0
1/
2/
3/
4/

7/
8/
9/
0/

2/
3/

6/
7/
6/

1/

5/
2/1

2/3

Date

In the month of February the market is highly volatile on february28th

Market movement on February 28th



28-Feb-05

2120
2110
2106.2 2103.25
2100
2090
2080
2070
28-Feb-05
2060 2061.2
2050 2047.7
2040
2030
2020
2010
1 2 3 4

7. Types of securities

• Highly volatile securities
• Non volatile securities

8. Scientific methods involved in identification of securities

There are several different ways of measuring volatility

• Beta calculation of securities.
• Standard deviation
• Geometric standard deviation
• Beta coefficient
• R-squared
• 10-day average true range (ATR).



• Average range (high – low)
• True range

Average range

One of the easiest ways is to take the average range (high – low) over a given
period. The number of days (or hours, or weeks, etc.) will give a picture of the volatility
over that time period. A five-day average range calculation will give an idea of how
volatile the market has been the past week, but it won't reflect anything about the past six
months. A 100-day average range calculation would reflect volatility over a much longer
period.

.

Standard Deviation

The most common and basic measure of volatility is called standard deviation,
where volatility is measured in relation to a defined time frame. It takes into account the
way a security has performed in the past, and estimates the probability as the whether it
will perform in the same manner in the future. The most common way to calculate
standard deviation is to determine the deviation from an average monthly return over a
36-month time period, and then annualize that number. As a general rule, the higher the
standard deviation, the more volatile the security. However, standard deviation is not a
'relative measure', and has no base reference point by which to compare. Thus, the logical
way to use standard deviation is to compare one security's standard deviation to that of a
similar security.

The Beta Coefficient



Beta is used to measure the volatility of a security in relation to that of the stock
market as a whole. To determine the beta of any security, you need to know the security's
monthly returns and the returns of a benchmark index. For stocks and mutual funds that
hold stocks, the Standard & Poor's 500 Stock Index is the most frequently used index,
and is assigned a beta coefficient of one (1.0). For bonds and bond mutual funds, the
Lehman Brothers Aggregate Bond Index is the most prevalent benchmark, and is also
assigned a beta coefficient of one also. Any security with a beta higher than one is more
volatile than the relative market index, while any security with a beta less than one is less
volatile than the index. Like standard deviation, beta is typically measured using data
over a 36-month period. Beta is useful in providing a measurement of a security's past
volatility relative a specific benchmark or index, but it's important to verify that the most
relevant benchmark is used.

R-Squared

Whenever beta is used to measure volatility, you are likely to find an R-squared
statistic as well. Where the beta coefficient to measure volatility, R-squared measures the
reliability of the information used to determine beta. The lower the R-squared figure (on
a scale of 1 — 100), the less reliable the information.

Geometric Standard Deviation

It has become customary in the Mechanical Investing community to measure
volatility with a statistic known as the Geometric Standard Deviation (GSD), which is
defined as the exponential of the annual volatility:

GSD = exp[  ].



The notation GSD(M) is occasionally used to indicate that the GSD was calculated from
monthly data. By extension, the notations GSD(A) and GSD(D) mean that the GSD was
calculated from annual and daily data, respectively. Needless to say, GSD(A) is highly
unreliable because of the paucity of data from which it is calculated. In a later section we
shall see exactly how reliable these measures are, by studying their sampling variation.

By convention, CAGR and GSD figures are reported in "percentage" terms, where the
following relationships apply:

CAGR% = 100( CAGR – 1 ),
GSD% = 100( GSD – 1 ).

To summarize, when setting out to measure volatility or growth, three decisions need to
be made in advance: (a) the units in which time is measured, (b) the number of
observations per time unit, and (c) whether the result is to be given in instantaneous or
annualized form. Confusion can be avoided only when all three decisions are made with
total clarity.

9. Identification of securities
Securities identification for the month of January
UNDERLYING
DAILY UNDERLYING ANNUALISED
DATE SYMBOL VOLATILITY VOLATILITY

31-1-05 BANKINDIA 4.823796 92.15848 7.679874 2.85607767
31-1-05 SYNDIBANK 4.65439 88.922 7.410167 2.75577675
31-1-05 ANDHRABANK 4.123097 78.77165 6.564304 2.44120725
31-1-05 ARVINDMILL 3.69901 70.66948 5.889123 2.19011308
31-1-05 CANBK 3.909708 74.69487 6.224572 2.31486433
31-1-05 UNIONBANK 3.368426 64.35369 5.362807 1.99438117
31-1-05 BANKBARODA 3.280567 62.67515 5.222929 1.94236208
31-1-05 MASTEK 3.102795 59.27882 4.939901 1.83710633



31-1-05 POLARIS 3.022807 57.75064 4.812553 1.78974625
31-1-05 TATAPOWER 3.248215 62.05706 5.171422 1.92320667
31-1-05 SCI 2.991383 57.15029 4.762524 1.77114075
31-1-05 ORIENTBANK 2.688226 51.3585 4.279875 1.59164858
31-1-05 SBIN 2.605544 49.77885 4.148238 1.54269367
31-1-05PNB 3.412083 65.18775 5.432313 2.02022967
31-1-05 GAIL 2.659431 50.80836 4.23403 1.57459883
31-1-05 CIPLA 2.519124 48.12779 4.010649 1.49152542
31-1-05 MARUTI 2.634009 50.32266 4.193555 1.55954617
31-1-05 NATIONALUM 2.364218 45.16832 3.764026 1.39980833
31-1-05 NTPC 2.404578 45.9394 3.828283 1.42370492
31-1-05 HINDPETRO 2.309823 44.12911 3.677425 1.36760242
31-1-05 REL 2.616271 49.98378 4.165315 1.54904392
31-1-05 ITC 2.646245 50.55644 4.213036 1.56679133
31-1-05 HDFCBANK 2.551352 48.7435 4.061959 1.5106065
31-1-05 GUJAMBCEM 2.592657 49.53263 4.12772 1.5350625
31-1-05 MTNL 2.898799 55.38148 4.615123 1.716324
31-1-05 I-FLEX 2.359378 45.07586 3.756321 1.39694333
31-1-05 HEROHONDA 2.654795 50.71978 4.226649 1.57185358
31-1-05 SATYAMCOMP 2.405864 45.96397 3.830331 1.42446708
31-1-05 M&M 2.192303 41.88389 3.490324 1.29802092
31-1-05 IPCL 2.045748 39.08396 3.256997 1.21124867
31-1-05 ACC 2.292868 43.80519 3.650432 1.35756433
31-1-05 ICICIBANK 1.919359 36.6693 3.055775 1.13641608
31-1-05 RANBAXY 2.253274 43.04873 3.587394 1.33412025
31-1-05 BPCL 2.443998 46.69252 3.891043 1.44704508
31-1-05 TISCO 2.029524 38.77401 3.231168 1.2016435
31-1-05 WIPRO 2.121333 40.528 3.377334 1.25600067
31-1-05 BAJAJAUTO 2.21483 42.31426 3.526189 1.3113585
31-1-05 TATAMOTORS 1.993018 38.07656 3.173047 1.18002867
31-1-05 TATATEA 1.825975 34.8852 2.9071 1.08112483
31-1-05 BEL 1.643575 31.40046 2.616705 0.97312967
31-1-05 INFOSYSTCH 1.897003 36.24219 3.020183 1.12317967
31-1-05 HCLTECH 1.798322 34.35689 2.863074 1.06475183
31-1-05 DRREDDY 1.742509 33.29059 2.774216 1.03170658
31-1-05 HINDALC0 1.810941 34.59798 2.883165 1.07222425
31-1-05 IOC 1.626786 31.07971 2.589976 0.96318983
31-1-05 BHEL 1.888885 36.0871 3.007259 1.11837367
31-1-05 RELIANCE 1.60721 30.7057 2.558808 0.95159833
31-1-05 CNXIT 1.677221 32.04326 2.670271 0.99305025



31-1-05 HINDLEVER 1.752933 33.48973 2.790811 1.03787808
31-1-05 GRASIM 1.585475 30.29046 2.524205 0.93872975
31-1-05 TCS 1.591563 30.40678 2.533898 0.94233492
31-1-05 HDFC 1.752687 33.48504 2.79042 1.03773267
31-1-05 NIFTY 1.413499 27.00486 2.250405 0.83690625
31-1-05 ONGC 1.254692 23.97086 1.997571 0.74287925
31-1-05 NSE10YZC 0.734767 14.0377 1.169808 0.43504133
31-1-05 NSETB91D 0.517025 9.877749 0.823146 0.30612075
31-1-05 NSE10Y06 0.51106 9.763789 0.813649 0.30258908

FUTURES
VOLATILITY FUTURES ANNUALISED VOLATILITY Final volatility

4.809467 91.88475 7.657062 4.800985 1.944907
4.739768 90.55314 7.546095 4.790318 2.034541
4.216492 80.55597 6.712998 4.27179 1.830583
3.811807 72.82448 6.068706 3.878593 1.68848
3.826831 73.1115 6.092625 3.777761 1.462896
3.514454 67.14355 5.595296 3.600915 1.606533
3.41875 65.31514 5.442928 3.500566 1.558204
3.247103 62.03581 5.169651 3.332545 1.495438
3.1744 60.64683 5.053902 3.264156 1.47441
3.158247 60.33822 5.028185 3.104979 1.181772
3.027994 57.84974 4.820811 3.049671 1.27853
2.86699 54.77377 4.564481 2.972833 1.381184
2.802188 53.53572 4.46131 2.918616 1.375923
3.031505 57.91683 4.826402 2.806173 0.785943
2.698241 51.54982 4.295819 2.72122 1.146621
2.593143 49.54193 4.128495 2.636969 1.145444
2.604842 49.76544 4.14712 2.587574 1.028028
2.49412 47.6501 3.970841 2.571033 1.171225
2.4841 47.45866 3.954888 2.531183 1.107478
2.447403 46.75758 3.896465 2.528862 1.16126
2.538711 48.50201 4.041834 2.49279 0.943746
2.547011 48.66057 4.055048 2.488256 0.921465
2.506722 47.89086 3.990905 2.480298 0.969692
2.521281 48.16902 4.014085 2.479022 0.94396
2.630356 50.25288 4.18774 2.471416 0.755092



2.401469 45.88001 3.823334 2.426391 1.029447
2.506194 47.88077 3.990064 2.418211 0.846357
2.366134 45.20492 3.767077 2.34261 0.918143
2.276861 43.49937 3.624948 2.326927 1.028906
2.222136 42.45386 3.537821 2.326573 1.115324
2.309996 44.13241 3.677701 2.320136 0.962572
2.104468 40.2058 3.350483 2.214067 1.077651
2.21547 42.32649 3.527207 2.193087 0.858967
2.252484 43.03366 3.586138 2.139093 0.692048
2.085943 39.85189 3.320991 2.119348 0.917704
2.082119 39.77883 3.314902 2.058902 0.802901
2.06249 39.40382 3.283651 1.972293 0.660934
1.950185 37.25824 3.104853 1.924824 0.744796
1.887168 36.0543 3.004525 1.9234 0.842275
1.817383 34.72105 2.893421 1.920291 0.947161
1.894873 36.20151 3.016792 1.893613 0.770433
1.853643 35.4138 2.95115 1.886398 0.821646
1.806343 34.51013 2.875844 1.844137 0.812431
1.817348 34.72038 2.893365 1.821141 0.748917
1.712828 32.72353 2.726961 1.763771 0.800582
1.805952 34.50267 2.875222 1.756849 0.638475
1.688983 32.26797 2.688997 1.737399 0.785801
1.67777 32.05375 2.671146 1.678095 0.685045
1.66763 31.86003 2.655002 1.617124 0.579246
1.583032 30.24378 2.520315 1.581586 0.642856
1.573663 30.06479 2.505399 1.563064 0.62073
1.600695 30.58123 2.548436 1.510703 0.472971
1.426953 27.2619 2.271825 1.434919 0.598013
1.345791 25.71129 2.142608 1.399729 0.656849
0.665337 12.71125 1.059271 0.624229 0.189188
0.470852 8.995614 0.749635 0.443514 0.137393
0.434825 8.307326 0.692277 0.389688 0.087099

Securities identification for the month of February

UNDERLYING UNDERLYING
DAILY ANNUALISED
DATE SYMBOL VOLATILITY VOLATILITY



28-Feb-
05 NSETB91D 0.318904 6.092646 0.507721 0.188817
28-Feb-
05 NSE10Y06 0.368082 7.032202 0.586017 0.217935
28-Feb-
05 NSE10YZC 0.559194 10.68339 0.890283 0.331089
28-Feb-
05 NIFTY 1.02725 19.62559 1.635466 0.608216
28-Feb-
05 ONGC 1.179421 22.53281 1.877734 0.698313
28-Feb-
05 GRASIM 1.196704 22.86299 1.905249 0.708545
28-Feb-
05 CNXIT 1.307356 24.977 2.081417 0.774061
28-Feb-
05 TCS 1.318359 25.18721 2.098934 0.780575
28-Feb-
05 HINDALC0 1.32757 25.36319 2.113599 0.786029
28-Feb-
05 RELIANCE 1.375077 26.27082 2.189235 0.814158
28-Feb-
05 DRREDDY 1.448611 27.67567 2.306306 0.857695
28-Feb-
05 TATAMOTORS 1.534429 29.31522 2.442935 0.908506
28-Feb-
05 IOC 1.539658 29.41512 2.45126 0.911602
28-Feb-
05 RANBAXY 1.542023 29.46031 2.455026 0.913003
28-Feb-
05 TISCO 1.548294 29.58012 2.46501 0.916716
28-Feb-
05 NATIONALUM 1.556019 29.7277 2.477309 0.92129
28-Feb-
05 INFOSYSTCH 1.59107 30.39734 2.533112 0.942042



28-Feb-
05 NTPC 1.59162 30.40785 2.533987 0.942367
28-Feb-
05 ITC 1.60338 30.63253 2.55271 0.94933
28-Feb-
05 ICICIBANK 1.61902 30.93133 2.577611 0.958591
28-Feb-
05 HDFC 1.619342 30.93749 2.578124 0.958782
28-Feb-
05 HCLTECH 1.628412 31.11076 2.592563 0.964151
28-Feb-
05 ACC 1.636131 31.25823 2.604853 0.968722
28-Feb-
05 M&M 1.661675 31.74626 2.645522 0.983847
28-Feb-
05 BAJAJAUTO 1.670042 31.90612 2.658843 0.988801
28-Feb-
05 BEL 1.675728 32.01473 2.667894 0.992166
28-Feb-
05 CIPLA 1.708552 32.64184 2.720153 1.011601
28-Feb-
05 BHEL 1.741348 33.2684 2.772367 1.031019
28-Feb-
05 TATATEA 1.773471 33.88213 2.82351 1.050039
28-Feb-
05 WIPRO 1.77514 33.914 2.826166 1.051026
28-Feb-
05 IPCL 1.775798 33.92657 2.827214 1.051416
28-Feb-
05 MTNL 1.814013 34.65667 2.888056 1.074043
28-Feb-
05 SATYAMCOMP 1.819592 34.76326 2.896938 1.077346
28-Feb-
05 HINDPETRO 1.836468 35.08568 2.923806 1.087338



28-Feb-
05 GUJAMBCEM 1.845992 35.26763 2.938969 1.092977
28-Feb-
05 I-FLEX 1.869849 35.72342 2.976951 1.107102
28-Feb-
05 ORIENTBANK 1.874766 35.81735 2.984779 1.110013
28-Feb-
05 REL 1.875299 35.82754 2.985628 1.110329
28-Feb-
05 BPCL 1.933961 36.94827 3.079023 1.145062
28-Feb-
05 HDFCBANK 1.942202 37.10571 3.092143 1.149941
28-Feb-
05 POLARIS 1.951512 37.28359 3.106965 1.155453
28-Feb-
05 SCI 2.02046 38.60084 3.216737 1.196277
28-Feb-
05 SBIN 2.078229 39.70452 3.30871 1.230481
28-Feb-
05 MARUTI 2.086856 39.86933 3.322444 1.235588
28-Feb-
05 TATAPOWER 2.086968 39.87147 3.322622 1.235654
28-Feb-
05 HINDLEVER 2.095563 40.03567 3.336306 1.240743
28-Feb-
05 GAIL 2.134789 40.78509 3.398757 1.263968
28-Feb-
05 MASTEK 2.143458 40.9507 3.412559 1.269101
28-Feb-
05 HEROHONDA 2.323041 44.38164 3.69847 1.375429
28-Feb-
05 PNB 2.356346 45.01793 3.751494 1.395148
28-Feb-
05 BANKBARODA 2.603147 49.73306 4.144422 1.541275



28-Feb-
05 CANBK 2.765265 52.83031 4.402526 1.637261
28-Feb-
05 ARVINDMILL 2.878989 55.00301 4.583584 1.704595
28-Feb-
05 ANDHRABANK 3.16201 60.41012 5.034176 1.872166
28-Feb-
05 SYNDIBANK 3.35685 64.13253 5.344378 1.987528
28-Feb-
05 BANKINDIA 3.383669 64.64491 5.387076 2.003407
28-Feb-
05 UNIONBANK 3.411358 65.17391 5.431159 2.019801

On these particular days BANK OF INDIA and PUNJAB NATIONAL BANK are the
highly volatile securities because it is characterized with high price fluctuations and a
good trading volume and TCS is the low volatile security with low price fluctuation and a
considerable trading volume. for the above reasons I have selected these securities.

10. Comparison of securities with the market

Behavior of volatile securities when the market is volatile

SYMBOL OPEN HIGH LOW CLOSE
PNB 442 463.35 437 457.5
S&P CNX NIFTY 2061.2 2106.2 2047.7 2103.25
BANKINDIA 84 89.9 83.8 88.85
S&P CNX NIFTY 2061.2 2106.2 2047.7 2103.25



PNB VS S&P CNXNIFTY 50

470 2120
465
460 2100
455 2080
450 PNB
445 2060
440 NIFTY 50
435 2040
430 2020
425
420 2000
OPEN HIGH LOW CLOSE

BANK OF INDIA VS S&P CNXNIFTY 50

91 2120
90 2110
89 2100
88 2090
87 2080
86 2070 BANKINDIA
85 2060 NIFTY 50
84 2050
83 2040
82 2030
81 2020
80 2010
OPEN HIGH LOW CLOSE

Behavior of nonvolatile securities when the market is volatile


SYMBOL OPEN HIGH LOW CLOSE
TCS 1379 1385 1340 1380.9
S&P CNX NIFTY 50 2061.2 2106.2 2047.7 2103.25

TCS VS S&P CNXNIFTY 50

1390 2120
1380 2100
1370
1360 2080
TCS
1350 2060
1340 NIFTY 50
2040
1330
1320 2020
1310 2000
OPEN HIGH LOW CLOSE

11. Derivative strategies

After classifying the securities, we need to identify the suitable derivative strategies for
volatile market movements.

In general, the following derivative strategies are prevalent in the market

• Bull spread with call option
• Bull spread with put option
• Bear spread with call option
• Bear spread with put option
• Bull call spread
• Bear put spread
• Strangle



• Straddle
• Box spread
• Butterfly spread with calls
• Butterfly spread with calls

The pay-off for the above strategies are calculated and we will be identifying the suitable
derivative strategy(s) for volatile market. The same exercise would be followed for all
three classification viz., volatile, low volatile and normal securities.

12.1 Straddle

A straddle consists of a call and a put option with the same exercise price and the
same expiration. The buyer of a straddle buys the call and put, while the seller of a
straddle sells the same two options.

12.2 Strangle

Like a straddle, strangle consists of a put and a call option with the same
expiration date but with different exercise price. In a strangle, the call option has an
exercise price above the stock price and the put option has an exercise price below the
stock price.

12.3 Bull spread with call option

A bull spread in the options market is a combination of options designed to profit
if the price of the underlying good rises. A bull spread utilizing call options requires two
calls with the same underlying stock and the same expiration date, but with the different



exercise prices. The buyer of a bull spread buys a call with an exercise price below the
stock price and sells a call option with an exercise price above the stock price. This
spread is a bull spread because the trader hopes to profit from a price rise in the stock.
The trade is a spread because it involves buying one option and selling a related option.

12.4 Bear spread with call option

A bear spread in the options market is a combination of options designed to profit
from falling stock prices. A bear spread utilizing call options requires two calls with the
same underlying stock and the same expiration date. The two calls however have
different exercise prices. To execute a bear spread with calls, a trader would sell the call
with the lower exercise price and buy the call with higher exercise price. In other words,
the bear spread with calls is just the short position to the bull spread with calls.

12.5 Bull spread with put option

A bull spread utilizing put options requires two calls with the same underlying
stock and the same expiration date, but with the different exercise prices. The bull spread
consists of buying a put option with a lower exercise price and selling the put option with
higher exercise price.

12.6 Bear spread with put option

A bear spread utilizing put options requires two calls with the same underlying
stock and the same expiration date, but with the different exercise prices. The bear spread
consists of buying a put option with a higher exercise price and selling the put option
with lower exercise price.

12.7 Box spread



A box spread consist of a bull spread with calls plus a bear spread with puts, with
the two spreads having the same pairs of exercise prices.

12.8 Butterfly spread with call option

A butterfly spread can be executed by using three calls with the same expiration
date on the same underlying stock.
• The long trader buys one call with a low exercise price, buys one call with high
exercise price, and sells two calls with intermediate exercise price.
• The short trader sells one call with a low exercise price, sells one call with high
exercise price, and buying two calls with intermediate exercise price.

12.9 Butterfly spread with put option

A butterfly spread can be executed by using three calls with the same expiration
date on the same underlying stock.
• The long trader buys a put with a low exercise price, buys one put with high
exercise price, and sells two calls with intermediate exercise price.
• The short trader sells a put with a low exercise price, sells a put with high exercise
price, and buys two puts with intermediate exercise price.

12. Calculation of pay offs

Payoffs for volatile security



Straddle

SCRIPT NAME PNB
OPTIO STRIKE COST SELLLIN LOTSIZ

DATE N PRICE PRICE G PRICE SP-CP E TOTAL
28-Feb-
05 CA 420 23.5 37 13.5 1200 16200
28-Feb-
05 PA 420 20.25 12.3 -7.95 1200 -9540
6660

Strangle

SCRIPT NAME PNB

28-Feb-
05 CA 420 23.5 37 13.5 1200 16200
28-Feb-
05 PA 400 10.9 5.5 -5.4 1200 -6480
9720

Bull call spread

SCRIPT NAME PNB

28-Feb-
05 CA 420 23.5 37 13.5 1200 16200
28-Feb-
05 CA 440 10 19.25 9.25 1200 11100
27300



Bear put spread

SCRIPT NAME PNB

28-Feb-
05 PA 420 20.25 12.3 -7.95 1200 -9540
28-Feb-
05 PA 400 10.9 5.5 -5.4 1200 -6480
-16020

Bull spread with call option

SCRIPT NAME PNB
OPTIO STRIKE COST SELLLING LOTSIZ

DATE N PRICE PRICE PRICE SP-CP E TOTAL
28-Feb-
05 CA 420 23.5 37 13.5 1200 16200
28-Feb-
05 CA 460 6.1 8.85 2.75 1200 3300
19500

Bear spread with put option

SCRIPT NAME PNB




28-Feb-
05 PA 400 10.9 5.5 -5.4 1200 -6480
28-Feb-
05 PA 450 25.25 26.5 1.25 1200 1500
-4980

Box spread

SCRIPT NAME PNB

28-Feb-
05 CA 420 23.5 37 13.5 1200 16200
28-Feb-
05 CA 460 6.1 8.85 2.75 1200 3300
28-Feb-
05 PA 400 10.9 5.5 -5.4 1200 -6480
28-Feb-
05 PA 450 25.25 26.5 1.25 1200 1500
14520

Butterfly spread with call option

SCRIPT NAME PNB

28-Feb-
05 CA 430 13.5 28 14.5 1200 17400
28-Feb-
05 CA 410 31.8 31.8 0 1200 0
28-Feb-
05 CA 420 23.5 21.1 -2.4 2400 -5760
11640



Butterfly spread with put option

SCRIPT NAME PNB

28-Feb-
05 PA 440 23.3 21 -2.3 1200 -2760
28-Feb-
05 PA 420 20.25 12.3 -7.95 1200 -9540
28-Feb-
05 PA 400 10.9 5.5 -5.4 2400 -12960
-25260

Pay off for low volatile security

Straddle

SCRIPT NAME TCS

28-Feb-
05 CA 1350 53.5 62.75 9.25 250 2312.5
28-Feb-
05 PA 1350 44 23.6 -20.4 250 -5100
-2788



Strangle

SCRIPT NAME TCS

28-Feb-
05 CA 1350 53.5 62.75 9.25 250 2312.5
28-Feb-
05 PA 1290 16 15 -1 250 -250
2062.5

Bull call spread

SCRIPT NAME TCS

28-Feb-
05 CA 1350 53.5 62.75 9.25 250 2312.5
28-Feb-
05 CA 1440 14 15.8 1.8 250 450
2762.5

Bear put spread

SCRIPT NAME TCS




28-Feb-
05 PA 1290 16 15 -1 250 -250
28-Feb-
05 PA 1350 44 23.6 -20.4 250 -5100
-5350

Bull spread with call option

SCRIPT NAME TCS

28-Feb-
05 CA 1350 53.5 62.75 9.25 250 2312.5
28-Feb-
05 CA 1410 26 27.45 1.45 250 362.5
2675

Bear spread with put option

SCRIPT NAME TCS

28-Feb-
05 PA 1350 44 23.6 -20.4 250 -5100
28-Feb-
05 PA 1380 35 35 0 250 0
-5100



Box spread

SCRIPT NAME TCS

28-Feb-
05 CA 1350 53.5 62.75 9.25 250 2312.5
28-Feb-
05 CA 1410 26 27.45 1.45 250 362.5
28-Feb-
05 PA 1350 44 23.6 -20.4 250 -5100
28-Feb-
05 PA 1380 35 35 0 250 0
-2425

Butterfly spread with call option

SCRIPT NAME TCS

28-Feb-05 CA 1470 15.95 15.95 0 250 0
28-Feb-05 CA 1410 26 27.45 1.45 250 362.5
28-Feb-05 CA 1440 14 15.8 1.8 500 900
1262.5

Butterfly spread with put option

SCRIPT NAME TCS

28-Feb- PA 1470 15.95 15.95 0 250 0



05
28-Feb-
05 PA 1410 26 27.45 1.45 250 362.5
28-Feb-
05 PA 1440 14 15.8 1.8 500 900
1262.5

13. Conclusion and Recommendations

The main aim of this project work is to find out the best strategy that gives
maximum pay offs to the investor in the volatile market condition. The
payoff for both volatile and non – volatile securities are calculated and the
best strategy for the volatile security in the volatile market condition after
taking in to following constraints such as brokerage charges, and a
supportive strategy that will not make loss to the investor.

As per the payoffs calculated for the volatile security in the volatile market
condition (i.e. Pnb) the best strategy would be box spread, which has two-
call option, and two put option, and it gives the maximum payoff.



The best strategy for non-volatile security (i.e. Tcs) in the volatile market
condition would be strangle because it has both call and put option so the
possibility of incurring loss is comparatively low, and the second best
strategy would be bull call spread.

14. References

www.nseindia.com
www.ivolatility.com

www.mof.nic.in
www.ndtv.com
www.derivativesindia.com
www.sebi.gov.in

Futures, options and swaps by Robert W. Kolb.
Understanding futures market by Robert W. Kolb.
Futures and options by Hans R.Stoll and Robert E. Whaley.
Rules, regulations and bye – laws, (F &O segment) of NSE & NSCCL



NSE NCFM material.


Derivatives Strategy for Volatile Markets

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