This report illustrate the derivative strategies for NIFTY BANK based on month of July and also takes in account which strategies to use in different market scenario to make maximum profit.

1. Derivatives Strategies:
Bank Nifty
1 July 2016-28 July 2016
By Varsha Chauhan

2. 2
Table of Contents
BANK NIFTY: OVERVIEW..................................................................................................... 3
Portfolio Characteristics ....................................................................................................... 3
Statistics................................................................................................................................ 3
Fundamentals ....................................................................................................................... 3
Top constituents by Weightage............................................................................................. 3
Index Methodology................................................................................................................ 4
Eligibility Criteria for Selection of Constituent Stocks:................................................... 4
Index Re-Balancing: .......................................................................................................... 4
Index Governance:............................................................................................................. 4
FUTURE CONTRACT SPECIFICATION ............................................................................... 5
Contract Specifications ......................................................................................................... 5
Trading Parameters.............................................................................................................. 5
OPTION CONTRACT SPECIFICATION ................................................................................ 6
Contract Specifications ......................................................................................................... 6
Trading Parameters.............................................................................................................. 6
ANALYSIS BASED ON FUTURES......................................................................................... 7
Short hedge: .......................................................................................................................... 7
Identifying Arbitrage Opportunity....................................................................................... 8
ANALYSIS BASED ON OPTION ............................................................................................ 9
Protective Put Buying:.......................................................................................................... 9
Long Call............................................................................................................................... 9
Short Put............................................................................................................................... 9
Long Straddle.......................................................................................................................10
Call back spread...................................................................................................................10
Married Put..........................................................................................................................11
SYNTHETIC POSITION.........................................................................................................12

3. 3
BANK NIFTY: OVERVIEW
The Nifty Bank Index is an index comprised of the most liquid and large capitalized Indian
Banking stocks. It provides investors and market intermediaries with a benchmark that
captures the capital market performance of the Indian banks.
The Index has 12 stocks from the banking sector, which trade on the National Stock
Exchange (NSE).
Nifty Bank Index is computed using free float market capitalization method, wherein the
level of the index reflects the total free float market value of all the stocks in the index
relative to particular base market capitalization value.
Nifty Bank Index can be used for a variety of purposes such as benchmarking fund
portfolios, launching of index funds, ETFs and structured products.
Portfolio Characteristics
Methodology Free Float Market Capitalization
No. of Constituents 12
Launch Date September 15, 2003
Base Date January 01, 2000
Base Value 1000
Calculation Frequency Online Daily
Index Rebalancing Semi-Annually
Statistics
QTD YTD 1 Year 5 Years Since
Inception
Return (%) 10.02 16.93 15.40 15.70 19.60
1 Year 5 Year Since Inception
Std Deviation 20.46 24.44 31.20
Beta (Nifty 50) 1.19 1.32 1.06
Correlation (Nifty) 0.88 0.88 0.82
Fundamentals
P/E P/B Dividend Yield
29.21 2.5 0.77
Top constituents by Weightage
Company’s Name Weight (%)
HDFC Bank Ltd 31.24
ICICI Bank Ltd 18.11
Axis Bank Ltd. 12.04
Kotak Mahindra Bank Ltd. 11.26
State Bank of India 9.46
IndusInd Bank Ltd. 7.09
Yes Bank Ltd. 5.42
Bank of Baroda 1.86
Federal Bank Ltd. 1.43
Punjab National Bank 1.15

4. 4
Index Methodology
Eligibility Criteria for Selection of Constituent Stocks:
i. Companies must rank within top 800 based on both average daily turnover and average daily
full market capitalization for the last six months.
ii. Companies should form a part of the Banking sector.
iii. The company's trading frequency should be at least 90% in the last six months.
iv. The company should have a listing history of 6 months. A company which comes out with an IPO
will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the index
for a 3 month period instead of a 6 month period.
v. Companies that are allowed to trade in F&O segment are only eligible to be constituent of the
index.
vi. Final selection of 12 companies shall be done based on the free-float market capitalization of the
companies.
Index Re-Balancing:
Index is re-balanced on semi-annual basis. The cut-off date is January 31 and July 31 of each year,
i.e. For semi-annual review of indices, average data for six months ending the cut-off date is
considered. Four weeks prior notice is given to market from the date of change.
Index Governance:
A professional team at IISL manages Nifty Bank Index. There is a three-tier governance structure
comprising the Board of Directors of IISL, the Index Policy Committee and the Index Maintenance
Sub-Committee.

5. 5
FUTURE CONTRACT SPECIFICATION
Contract Specifications
Security descriptor

 Market type N
Instrument Type FUTIDX
Underlying BANKNIFTY
Expiry date 28 July 2016
Trading cycle 3-month trading cycle - the near month (one),
the next month (two) and the far month (three).
Expiry day Last Thursday
Trading Parameters
The value of the futures contracts on BANKNIFTY may not be less than Rs. 5 lakhs at the
time of introduction. The permitted lot size for futures contracts & options contracts shall
be the same for a given underlying or such lot size as may be stipulated by the Exchange
from time to time.
Contract size 40
Price steps Re.0.05
Base Prices First day of trading: Theoretical futures price.
Subsequent trading days: Daily settlement price of the futures
contracts.
Price bands +/- 10 %.
Quantity freeze Index Level
From To Quantity Freeze Limit
0 5750 15000
5751 8625 10000
8626 11500 7500
11501 17250 5000
> 17250 2500
Order type/Order
book/Order
attribute
 Regular lot order

 Stop loss order
 Immediate or cancel
 Spread order

6. 6
OPTION CONTRACT SPECIFICATION
An option gives a person the right but not the obligation to buy or sell something. An option
is a contract between two parties wherein the buyer receives a privilege for which he pays a
fee (premium) and the seller accepts an obligation for which he receives a fee. The premium
is the price negotiated and set when the option is bought or sold.
The options contracts are European style and cash settled and are based on the BANK
NIFTY index.
Contract Specifications
Security descriptor  Market type N
Instrument Type OPTIDX
Underlying BANKNIFTY
Expiry date
Option Type CE/ PE
Strike Price Strike price for the contract
Trading cycle BANKNIFTY monthly options contracts: the near month
(one), the next month (two) and the far month (three)
BANKNIFTY weekly options
contracts
7 weekly expires excluding
the expiry week of monthly
contract
Expiry day Last Thursday of the expiry month
Trading Parameters
Contract size 40
Price steps Re.0.05
Base Prices First day of trading: Theoretical futures price based on Black-
Scholes model of calculation of options premiums.
Subsequent trading days: Daily close price of the options contracts.
Price bands +/- 10 %.
Quantity freeze Index Level
From To Quantity Freeze Limit
0 5750 15000
5751 8625 10000
8626 11500 7500
11501 17250 5000
> 17250 2500
Order type/Order
book/Order
attribute
 Regular lot order
 Stop loss order
 Immediate or cancel
 Spread order

7. 7
ANALYSIS BASED ON FUTURES
As future price during July is greater than Spot, basis is negative. Thus Contango Market
Short hedge:
Hedging with Index futures:
No. of contacts = (Beta of portfolio * Portfolio Value) / Future Contract Value
No. of contacts = (1.19*(18390.95*40)) / (18478.7*40) = 1.18
Scenario I Scenario II
11 July 2016 28 July 2016 (Expiry)
(Bull)
28 July 2016 (Expiry)
(Bear)
Spot price 18390.95 19076.6 17705.35
Futures Price 18478.7 19076.6 17705.35
Buy spot Sell future Net Profit
Scenario I 685.6 -597.85 87.75
Scenario II -685.6 773.35 87.75
1. Long conformation: Strong Market
2. Contango market
3. Highest -basis so gap between future price & spot price is higher and at expiry spot
price=future price. Thus Short hedge opportunity
17400
17600
17800
18000
18200
18400
18600
18800
19000
19200
Spot
Future

8. 8
Date Change in Price Change in volume Change In OI Market Status
4-Jul-16 88.90 8142.00 106880.00 Long Assimilation
5-Jul-16 69.95 3412.00 65680.00 Long Covering
7-Jul-16 65.50 16097.00 2920.00 Long conformation
8-Jul-16 79.75 8499.00 17880.00 Strong Assimilation
11-Jul-16 419.20 3483.00 195760.00 Long conformation
12-Jul-16 217.95 2648.00 142080.00 Long Assimilation
Identifying Arbitrage Opportunity
In month of July there is no Arbitrage Opportunity as the difference future fair value and
actual future value is merely 1% of future value. (140)

9. 9
ANALYSIS BASED ON OPTION
Protective Put Buying:
Investor has bought 40 shares of Bank Nifty @ 17985.65 on 1 July 2016 (Bullish view)
Date Future Price
1-Jul-16 17985.65
4-Jul-16 18097.65
5-Jul-16 18004.25
7-Jul-16 18084.9
8-Jul-16 18016.25
The Investor believes that price would probably continue to rise, but was also concerned it
could start dropping back down in price, then using a protective put would be an ideal
solution.
On 8th July Investor @ strike price 18000 Put premium 252.5 bought 1 lot
Date Price Premium Total Gain/loss
Buy Spot 1st July 17985.65 -
Buy Put 8th July 18000 252.5
Scenario I
(Bull)
Sell Spot /
Exercise put
28th July 19076.6 - (1060.3- 252.5)= 807.8
Scenario II
(Bear)
Sell Spot /
Exercise put
28th July 16925.35 - (-1060.3 + 1074.65 - 252.5)=
-238.15
As at expiry prices are gone up investor will sell spot @ 19076.6
And will not exercise Put option (Right but not obligation) so has to pay put premium 252.2
So total gain will be there buy gain Rs. 32312 (807.8 * 40).
Long Call
Date Strike
Price
Underlying
Value
Premium Investment/Gain Total
Gain
Long Call 5-Jul-16 14700 18004.25 3295 3295(Investment)
Profit 28th July - 19076.6 4376.55(Gain) 1081.55
Loss 28th July - 13618.45 -1081.55(Loss) -3295
Short Put
Date Strike
Price
Underlying
Value
Premium Investment/Gain
Short Put 5-Jul-16 18400 17985.65 1655.65 -
Profit 28th July - 19076.6 1655.65
Loss 28th July - 13618.45 -1081.55

10. 10
Long Straddle
The long straddle is a suitable strategy for a volatile market, because it can make
potentially unlimited profits if the price of a security moves dramatically & limited Risk.
This basically means you should consider using it when you believe that a security will
move significantly in price, but you are not sure in which direction.
Scenario I: When at Expiry spot price is 19076.55
Scenario II: When at Expiry spot price is 16931.95
Scenario I Scenario I
Date
Strike
Price Premium Profit/Loss Net profit Profit/Loss Net profit
Buy call 5-Jul-16 18000 372.1
1076.55 –
372.1
405.45
-371.1
396.95
Buy put 5-Jul-16 18000 299 -299
1068.05-
299
5-Jul-16 Spot price: 18004.25
Call back spread
 The call backspread (reverse call ratio spread) is a bullish strategy in options
trading that involves selling a number of call options and buying more call options of
the same underlying stock and expiration date at a higher strike price.
 It is an unlimited profit, limited risk options trading strategy that is taken when the
options trader thinks that the underlying stock will experience significant upside
movement in the near term.
Spot price: 18100 @ 4th July 2016
Strike Price Premium
SELL 1 ITM CALL 18000 423.45
BUY 2 OTM CALL 18200 (317.7*2)= 635.4
Scenario I (@ expiry SP=19100) Scenario I (@ expiry SP=17100)
-1100 -676.55 0 423.45
1800 1164.6 -635.4 -635.4
488.05 -211.95

11. 11
PRICE PROFIT/LOSS
17100 -211.95
17600 -211.95
18100 -211.95
18600 -11.95
19100 488.05
19600 988.05
Married Put
The Married Put is an option strategy in which the options trader buys an at-the-money put
option while simultaneously buying an equivalent number of shares of the underlying
stock.
Spot Price 18000 @ 1st July 2016
Price Premium Scenario I (@ expiry SP=19400) Scenario I (@ expiry SP=17900)
Buy Spot 18000 - 1400 -100
Buy ATM put 18000 333 -333 -233
- 1067 -333
Spot Price Profit/loss
16900 -333
17400 -333
17900 -333
18400 67
18900 567
19400 1067
-400
-200
0
200
400
600
800
1000
1200
17100 17600 18100 18600 19100 19600
Series1
-600
-400
-200
0
200
400
600
800
1000
1200
16900 17400 17900 18400 18900 19400
Series1

12. 12
SYNTHETIC POSITION
There are two common reasons for using these strategies:
 First, you would use them as a simple way to try and profit if your outlook on an
existing position changes, they can be used to adjust an existing stock position to try
and profit from a period of volatility, or to try and profit from a period of stability.
 Second, you would use them because there are typically fewer transactions involved
in turning an existing position into a synthetic position than there would be in
closing the position and creating the relevant position from scratch. By making
fewer transactions you would have to pay less in commissions to your broker.
Long Call=Long Put + Long Future
Date Strike Price Premium Profit/Loss Net profit
Synthetic
Position
LONG
CALL 1-Jul-16 18100 335.95 976.55 640.6
640.6
Long Put 1-Jul-16 18100 377.7 -377.7 -377.7
644.5
Long Future 1-Jul-16 18054.8 - 1021.75 1021.75
Long Future =Short Put + Long Call
Positions Date Strike Price Premium Profit/Loss Net profit
Synthetic
Position
long call 11-Jul-16 18500 234.05 576.55 342.5 597.5
Short Put 11-Jul-16 18500 255 255 255
LONG FUTURE 11-Jul-16 18478.7 - 597.85 597.85 597.85