The document describes two option strategies implemented on SBI stock - a bull call spread before the company's earnings announcement and writing straddles after. For the bull call spread, the stock was expected to rise with increased volatility before results. This strategy realized a profit. For writing straddles after results, the stock was expected to trade in a range with decreasing volatility. Utilizing the time decay over a long weekend, this strategy also proved profitable. The document analyzes the relevant market data and outlines the risk-reward profiles of both strategies.

1. DESIGNING OPTION STRATEGIES &
RISK EVALAUATION
Submitted by –
Sudheer Jaisawal
AUGUST 20, 2016

2. Objective
The objective of the project is to be able setup a few options strategies and evaluate the risks and rewards.
1) Set up at least one bull/bear spread and one Volatility spread.
2) Draw the payoff diagram based on the price prior to the setup
3) Use high frequency data from Bloomberg
4) Calculate the Greeks on an hourly basis to evaluate the risks
5) Present a view based on volatility, news before starting the spread
7) Clearly outline the benefits and risks during the spread period
8) The spread needs be held at least for a certain time. Justify the time for holding the spread
Methodology
We performed below steps to achieve our objective –
1. Analysed the news, corporate events, historical and implied volatility and prior movement of stock in last 6
months.
2. Developed a view about direction of further movement of Stock, Volatility
3. Selected the best strategies based on the view and evaluated risk and reward profile
4. Designed payoff diagram with all the possibility of time decay, also created exit points
5. Executed strategy and reported result.
Scenario 1
Date of Analysis : 05 Aug, 2016
Information Available:
1. SBI will declare result on 12 Aug, 1 week is left in result declaration
2. Last quarter, the result of SBI was poor due to asset quality review and clean-up of balance
sheet enforced by RBI governor.
3. SBI overreacted and dropped significantly in the month of April and May after the last
quarter result, but since then expectation was built up that in coming quarter that SBI will
improve its earnings.
4. SBI rallied around 40% in next two quarter and it is about to declare the result in next week
Our Expectation:
We believe the result would be better than last quarter and also hope that volatility of stock
will go up due to this event.
Preferred Strategy:
Bull Call Spread (Up movement expected, Volatility will also go up)

3. Price Information
Historical Volatility Vs Implied Volatility
5th
Aug, 2016 - Implied volatility is
around 40% for 100% moneyness
option and it is expected to go up
due to result news.
5th
Aug, 2016 - Stock has rallied already 40% in
last two month and result is about to get
declared in one week

4. Volatility Surface
There is skewness in implied volatility surface which
contradicts Black Sholes option pricing. Here the
volatility is forming ‘Smile’ which mean that market
is implying more volatility for deep in the money and
out of the money options.
Strategy Description
Name: Bull Call Spread
Expected Payoff
-15000.00
-10000.00
-5000.00
0.00
5000.00
10000.00
15000.00
20000.00
25000.00
Expected Payoff
P&L 20 Days Left P&L 13 Days Left P&L 6 Days Left P&L 1 Days Left
CE 240 CE 250
Strike Price 240 250
Option Price 5.50 2.65
Delta 0.39 0.23
Gamma 0.018 0.015
Theta -0.18 -0.15
Vega 0.21 0.17
Implied
Volatility 38.3% 37.9%
Strategy
Buy 1 CE 240 Sell 1
CE 250
Maximum Loss 2.85
Maximum Gain 7.15
Reward to Risk Profile 2.50877193
Lot Size 3000
Expiry Date 08/25/2016
Time to Expiry 0.0548
Risk-free Rate 7%
Dividend Yield 0%

5. Realized Payoff
Trade Summary
Date of Entering Trade 05/08/2016
Investment Rs. 8550.00
Date of Exiting Trade 12/08/2016
Profit Earned Rs. 8550.00
Holding Period 7 Days
Scenario 2
Date of Analysis : 12 Aug, 2016
Information Available:
1. SBI has declared the result on 12 Aug and stock has rallied around 9% in a day. The result
was not so great, although the bank has controlled NPA very much compare to last quarter.
2. After 12th
August, there is long weekend of 3 days and SBI has overreacted on not so much
great result so we expect that there would be slight correction on Tuesday.
3. Time Decay can be utilized as we have 3 days’ bonus (holidays) with no market activity,
stock has overreacted on not so very great result.
4. Some important announcement is pending from US like Fed will lower rate and
macroeconomic data about inflation in US. Stock market will speculate.
Our Expectation:
Share will trade within bounded range and its volatility will go down which is now trading at
peak. It might correct in next two - three days.
Preferred Strategy:
Write Straddles (Range Bound Movement, Volatility to Go Down, Time Decay is fast )
215
220
225
230
235
240
245
250
-6000
-4000
-2000
0
2000
4000
6000
8000
10000
Date
08/05/201610:15
08/05/201611:15
08/05/201612:15
08/05/201613:15
08/05/201614:15
08/05/201615:15
08/08/20169:15
08/08/201610:15
08/08/201611:15
08/08/201612:15
08/08/201613:15
08/08/201614:15
08/08/201615:15
08/09/20169:15
08/09/201610:15
08/09/201611:15
08/09/201612:15
08/09/201613:15
08/09/201614:15
08/09/201615:15
08/10/20169:15
08/10/201610:15
08/10/201611:15
08/10/201612:15
08/10/201613:15
08/10/201614:15
08/10/201615:15
08/11/20169:15
08/11/201610:15
08/11/201611:15
08/11/201612:15
08/11/201613:15
08/11/201614:15
08/11/201615:15
08/12/20169:15
08/12/201610:15
08/12/201611:15
08/12/201612:15
08/12/201613:15
08/12/201614:15
Realized Payoff
Profit&Loss SBIN-EQ

6. Price Information
Historical Volatility Vs Implied Volatility
12th
Aug, 2016 - Implied volatility is around 40% for 100%
moneyness option and it will come down as result have been
declared and trade will happen in bound range
12th
Aug, 2016 - Stock has rallied 9% up on
declaration of result and it will trade within
range in next few days.

7. Volatility Surface
There is skewness in implied volatility surface which
contradicts Black Sholes option pricing. Here the
volatility is forming ‘Smile’ which mean that market
is implying more volatility for deep in the money and
out of the money options.
Its implication is that out of the money and deep in
the money have implied volatility.
Strategy Description
Name: Writing Straddles
Strategy
Sell 1 CE 245, Sell 1 PE
245
Maximum Loss
Unlimited, but position
can be closed early
Maximum Gain 11.85
Reward to Risk Profile Not Applicable
Lot Size 3000
Expiry Date 08/25/2016
Expected Payoff
-80000.00
-60000.00
-40000.00
-20000.00
0.00
20000.00
40000.00
60000.00
Expected Payoff
P&L 13 Days Left P&L 9 Days Left P&L 5 Days Left P&L 0 Days Left
CE 245 PE 245
Strike Price 245 245
Option Price 5.60 6.25
Delta 0.48 0.48
Gamma 0.026 0.028
Theta -0.21 -0.20
Vega 0.18 0.18
Implied
Volatility 33.4% 31.0%
Time to Expiry 0.0548
Risk-free Rate 7%
Dividend Yield 0%

8. Realized Payoff
Trade Summary
Date of Entering Trade 12/08/2016
Investment 0, Only Margin Required
Date of Exiting Trade 18/08/2016
Profit Earned Rs. 9000.00
Holding Period 6 Days
Assumptions
1. We have assumed zero transactions cost
Conclusion:
1. We setup both bull call spread and volatility spread (writing straddles) and reported profit.
2. Time decay utilized on long weekend resulted into a good profit.
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240
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Realized Payoff
SBIN-EQ Profit&Loss