ISSN: 2320-5407 Int. J. Adv. Res.

6(5), 1337-1344

Journal Homepage: -www.journalijar.com

Article DOI:10.21474/IJAR01/7164
DOI URL: http://dx.doi.org/10.21474/IJAR01/7164

RESEARCH ARTICLE

OPTIMAL TRADING STRATEGIES AND PERFORMANCE OF OPTIONS AT NSE.

Ramasamy. V1And Dr. G. Prabakaran2.

1. Ph.D Research Scholar, Management, Bharathiar University, Coimbatore, Tamilnadu.
2. Assistant Professor, Government Arts College Dharmapuri, Tamilnadu.
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Manuscript Info Abstract
……………………. ………………………………………………………………
Manuscript History Option is the most important segment in derivatives market in India.
One of the most powerful aspects of trading with options is that there’s
Received: 21 March 2018 an option strategy for almost any situation. Straddles and strangles
Final Accepted: 23 April 2018 are non-directional strategies, meaning that they have the ability to
Published: May 2018
profit whether the price of the underlying index moves up or down.
Keywords:- Financial derivatives have emerged as one of the biggest market of the
Derivatives, Options, Operational world during the past two decades in terms of trading volume, number
Strategies of options, Straddle and of index and stock options available for trading, participation of
Strangle. investors in derivatives market. It is also observed that investors are
showing lot of interest in the derivatives market. However, investors
have lost lot of money in the derivatives market due to lack of
knowledge about the product and investment strategies etc. The risk
involved in futures and options trading can be minimized / return on
futures and options trading can be improvised through designing
suitable investment strategies. So, investors need to develop risk
management as well as risk analysis tool which is the key to limiting
risks. The derivatives contract is standardized contract. In India, the
BSE Sensex and S&P Nifty are the popular indices on futures and
options trading. The everyday price changes will occur on underlying
assets. Some of the major factors such as weather, war, Debt, refugee
displacement, land reclamation and micro &macro economic factors
will affect the index prices. Options can be used to create portfolio with
unique features, capable of achieving investment objectives. Keeping
this view the present paper proceeds to investigate the operational
strategies and performance of options trading at NSE in India.

Copy Right, IJAR, 2018,. All rights reserved.

……………………………………………………………………………………………………....
Introduction:-
In finance, an option is a contract which gives the owner the right, but not the obligation, to buy or sell an
underlying asset or instrument at a specified strike price on or before a specified date. The seller incurs a
corresponding obligation to fulfil the transaction that is to sell or buy, if the long holder elects to "exercise" the
option prior to expiration. The buyer pays a premium to the seller for this right. An option which conveys the right
to buy something at a specific price is called a call; an option which conveys the right to sell something at a specific
price is called a put. The power of options lies in their versatility. Options enable investor to adapt or adjust their
position according to any situation that arises. Options can be as speculative or as conservative as investor want.

Corresponding Author:- Ramasamy. V. 1337

Address:- Ph.D Research Scholar, Management, Bharathiar University, Coimbatore, Tamilnadu.
ISSN: 2320-5407 Int. J. Adv. Res. 6(5), 1337-1344

This means investor can do everything from protecting a position from a decline to outright betting on the
movement of a market or index.

Options trading are an extremely vast field unlike stock trading. In stock trading, investor either buy or sell short the
stock itself, that’s all there is to it. However, in options trading, there are two kinds of options; Call options and Put
options on every option able stock and each kind of option can be bought or shorted or put together into
combinations of advanced strategies in order to cater to specific outlooks.

Portfolio risk refers to the possibility that an investment portfolio will not earn the expected or desired rate of return.
Investors attempt to reduce this risk through diversification or hedging (taking an offsetting position in a related
security). Portfolio risk includes both systematic and unsystematic risk. Systematic risk is risk that impacts the
overall market; for example, inflation, interest rate changes, or economic conditions. Unsystematic risk, such as
product defects or management turnover, is unique to individual securities.

Objectives of the study:-

The objectives of the study are set as follows;
1. To learn about NSE’s Derivatives Market and Options Trading.
2. To study about Optimal Strategies of Options.
3. To know the outcome of Optimal Strategies.

Research Methodology:-
The study on the topic Operational Strategies and Performance of Options Trading in India is based exclusively on
secondary data taken from various articles, newspapers and bulletins and reports issued by NSE. The study period
ranging from 2014 to 2016.

Returns:-
Long = Rt= (Pt-Pt-1)/ Pt-1*100 or (Current Stock price – Previous day stock price)/ Previous day stock price*100)

Short = (Current Stock price – Next day stock price)/ Next day stock price*100)

Where,
Rt = Return at the time
P= The Closing price of the day
Pt-1 = The Closing price of the day t-1

Optimal Trading Strategies of options:-

Straddle:-
This strategy involves two options of same strike prices and same maturity. A long straddle position is created by
buying a call and a put option of same strike and same expiry whereas a short straddle is created by shorting a call
and a put option of same strike and same expiry.

Long Straddle:-
If a person buys both a call and a put at these prices, then his maximum loss will be equal to the sum of these two
premiums paid, which is equal to 393. And, price movement from here in either direction would first result in that
person recovering his premium and then making profit. This position is undertaken when trader’s view on price of
the underlying is uncertain but he thinks that in whatever direction the market moves, it would move significantly in
that direction.

Pay off Charts for Long Straddle:-

Let us say Nifty is trading at Rs 6,000 and premiums for ATM call and put options are 257 and 136 respectively.

Now, let us analyze his position on various market moves. Let us say the stock price falls to 5300 at expiry. Then,
his pay offs from position would be:
Long Call: 257 (market price is below strike price, so option expires worthless)
Long Put: 136 (5300 - 6000) = 564
Net Flow: 564 – 257 = 307

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As the stock price keeps moving down, loss on long call position is limited to premium paid, whereas profit on long
put position keeps increasing.
Now, consider that the Nifty price shoots up to 6700.
Long Call: 257 (6000 – 6700) = 443
Long Put: 136
Net Flow: 443 – 136 = 307

As the Nifty price keeps moving up, loss on long put position is limited to premium paid, whereas profit on long call
position keeps increasing.

Thus, it can be seen that for huge swings in either direction the strategy yields profits. However, there would be a
band within which the position would result into losses. This position would have two Break even points (BEPs) and
they would lie at “Strike – Total Premium” and “Strike + Total Premium”. Combined pay‐off may be shown as
follows:
Option Call Put
Long / Short Long Long
Strike 6000 6000
Premium 257 136
Spot 6000

Chart 1:-Pay off Charts for Long Straddle

It may be noted from the picture, that maximum loss of Rs. 393 would occur to the trader if underlying expires at
strike of option viz. 6000. Further, as long as underlying expires between 6393 and 5607, he would always incur the
loss and that would depend on the level of underlying. His profit would start only after recovery of his total premium
of Rs. 393 in either direction and that is the reason there are two breakeven points in this strategy.

Short Straddle:-
This would be the exact opposite of long straddle. Here, trader’s view is that the price of underlying would not move
much or remain stable. So, he sells a call and a put so that he can profit from the premiums. As position of short
straddle is just opposite of long straddle, the pay off chart would be just inverted, so what was loss for long straddle
would become profit for short straddle.

Pay off Charts for Short Straddle:-

Position may be shown as follows:
Option Call Put
Long / Short Short Short

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Strike 6000 6000

Premium 257 136
Spot 6000

Chart 2:-Pay off Charts for Short Straddle

It should be clear that this strategy is limited profit and unlimited loss strategy and should be undertaken with
significant care. Further, it would incur the loss for trader if market moves significantly in either direction – up or
down.

Strangle:-
This strategy is similar to straddle in outlook but different in implementation, aggressionand cost.

Long Strangle:-
As in case of straddle, the outlook here (for the long strangle position) is that the market will move substantially in
either direction, but while in straddle, both options have same strike price, in case of a strangle, the strikes are
different. Also, both the options (call and put) in this case are out‐of‐the‐money and hence the premium paid is low.

Pay off Charts for Long Strangle:-

Let us say the cash market price of a stock is 6100. 6200 strike call is available at 145 and 6000 put is trading at a
premium of 140. Both these options are out‐of‐the‐money.
Option Call Put
Long / Short Long Long
Strike 6200 6000
Premium 145 140
Spot 6100

If a trader goes long on both these options, then his maximum cost would be equal to the sum of the premiums of
both these options. This would also be his maximum loss in worst case situation. However, if market starts moving
in either direction, his loss would remain same for some time and then reduce. And, beyond a point (BEP) in either
direction, he would make money. Let us see this with various price points.

If spot price falls to 5700 on maturity, his long put would make profits while his long call option would expire
worthless.
Long Call: ‐ 145, Long Put: ‐140 – 5700 + 6000 = 160
Net Position: 160 – 145 = 15
As price continues to go south, long put position will become more and more profitable and long call’s loss would
be maximum limited to the premium paid.

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In case stock price goes to 6800 at expiry, long call would become profitable and long put would expire worthless.
Long Call: ‐145 – 6200 + 6800 = 455
Long Put: ‐140
Net Position: 455 – 140 = 315

Chart 3:-Pay off Charts for Long Strangle

In this position, maximum profit for the trader would be unlimited in both the directions – up or down and maximum
loss would be limited to Rs. 285, which would occur if underlying expires at any price between 6000 and 6200.
Position would have two BEPs at 5715 and 6485. Until underlying crosses either of these prices, trader would
always incur loss.

Short Strangle:-
This is exactly opposite to the long strangle with two out‐of‐the‐money options (call and put) shorted. Outlook, like
short straddle, is that market will remain stable over the life of options. Pay offs for this position will be exactly
opposite to that of a long strangle position. As always, the short position will make money, when the long position is
in loss and vice versa.

Pay off Charts for Short Strangle:-

Option Call Put
Long / Short Short Short
Strike 6200 6000
Premium 145 140
Spot 6100

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Chart 4:-Pay off Charts for Short Strangle

In this position, maximum loss for the trader would be unlimited in both the directions – up or down and maximum
profit would be limited to Rs. 285, which would occur if underlying expires at any price between 6000 and 6200.
Position would have two BEPs at 5715 and 6485. Until underlying crosses either of these prices, trader would
always make profit.

Table 1:-Result of Long Short Return of Straddle and Strangle Strategies from 2014 to 2016
Expiry Date, Year Long Straddle Short Straddle Long Strangle Short Strangle
Return Return Return Return
30-Jan-14 -0.34 -0.06 -0.59 0.05
26-Feb-14 -0.52 0.48 -0.80 1.18
27-Mar-14 0.54 -0.57 1.18 -0.68
24-Apr-14 -0.64 0.67 -0.93 1.29
29-May-14 0.04 0.12 0.05 0.19
26-Jun-14 0.76 -0.19 1.21 -0.20
31-Jul-14 -0.35 0.41 -0.46 0.85
28-Aug-14 0.08 -0.32 0.14 -0.39
25-Sep-14 -0.61 0.93 -0.85 1.16
30-Oct-14 -0.43 0.03 -0.63 0.15
27-Nov-14 -0.50 0.13 -0.70 0.53
24-Dec-14 1.20 -0.49 1.49 -0.58
29-Jan-15 0.71 -0.59 1.05 -0.67
26-Feb-15 -0.67 0.69 -0.86 1.47
26-Mar-15 -0.54 -0.15 -0.74 -0.17
30-Apr-15 -0.22 0.77 -0.28 0.96
28-May-15 -0.40 0.90 -0.52 1.04
25-Jun-15 0.29 0.69 0.26 0.73
30-Jul-15 -0.48 0.79 -0.61 0.86
27-Aug-15 0.82 -0.53 1.01 -0.62
24-Sep-15 -0.36 0.84 -0.52 0.96
29-Oct-15 0.16 0.21 0.27 0.35
26-Nov-15 -0.07 0.31 -0.21 0.71
31-Dec-15 -0.50 0.94 -0.69 1.05
28-Jan-16 3.03 -0.49 3.95 -0.57
25-Feb-16 1.31 -0.51 1.46 -0.59

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31-Mar-16 0.86 -0.53 1.22 -0.59

28-Apr-16 -0.39 0.77 -0.55 0.91
26-May-16 -0.54 0.62 -0.79 1.19
30-Jun-16 -0.48 0.58 -0.62 1.61
28-Jul-16 -0.16 -0.24 -0.16 -0.29
25-Aug-16 -0.75 1.18 -0.96 1.37
29-Sep-16 -0.09 0.66 0.00 0.70
27-Oct-16 -0.85 1.27 -1.06 1.53
24-Nov-16 1.65 -0.58 2.05 -0.66
29-Dec-16 -0.68 1.01 -0.86 1.17
The above table describes that the long and short return of four strategies have given positive return on cumulative
basis and Short strangle has given highest return followed by Short straddle, long strangle and long straddle which
shows finest strategies of overall options.

Table 2:-Result of Positive and Negative Return of Straddle and Strangle Strategies from 2014 to 2016
Long Straddle Short Straddle Long Strangle Short Strangle
Overall Trend Return Return Return Return
Positive 13 contract 23 contract 14 contract 24 contract
Negative 23 Contract 13 contract 22 contract 12 contract

The above table indicates comparing the long and short return of straddle and strangle strategies of options. This
analysis indicates 74 positive contract returns and 70 negative contacts out of 144 contact of selected period from
2014 to 2016.

Table 3:- Result of Long Short Return of Straddle and Strangle Strategies from 2014 to 2016
Long Straddle Return Short Straddle Return Long Strangle Return Short Strangle Return
2.92 3.74 3.69 5.77

The above table shows that the long and short return percentage of four strategies have given positive return on
cumulative basis and indicates better strategies of straddle and strangle in the options market.

Chart 5: -Result of Long Short Return of Straddle and Strangle Strategies from 2014 to 2016

Return from 2014 to 2016

Series1

5.77
3.74 3.69
2.92

Long Straddle Short Straddle Long Strangle Short Strangle

Return Return Return Return

The above Chart shows that the long and short return of four strategies have given positive return on cumulative
basis and Short strangle has given highest return followed by Short straddle, long strangle and long straddle which
shows best strategies of overall options.

Conclusion:-
Option strategies provide means of risk reduction, anyone who is at risk from a price change can use options to
offset that risk. Different strategies are useful for different market perceptions of the price movements. Option

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trading strategies are used for both hedging and speculation. In different market perception and price movements
different strategies are useful. Option strategies are complex positions created including a combination of options
and underlying shares which help the investor to benefit from his view. Hence the complexities of the investment
risks and their management gives rise to commensurate solution through a serious of innovative strategies in the
form of a combination of options of different types. It is indeed attribute to the versatility of the mechanics of option
trading that a customized solution can be worked out for each specific risk management problem.

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(September-October 2004): 71-76.
2. Don M. Chance. “Options Market Efficiency and the Box Spread Strategy.” TheFinancial Review 20
(November 2008): 287-301.
3. D.C. Patwari&Bhargava “Options and Futures an Indian perceptive” Jaico PublishingHouse, 2005
4. Fernandies& Santos (2002), Optimal Risk Management Using Options, Journal ofFinance, FIN-98-001.
5. N.D. Vohra& Bagri, “futures and options” Tata McGraw Publishing Company Limited,New Delhi, 2002
6. NCFM, Capital Market (Dealers) Module Work Book” National Stock Exchange OfIndia Limited 2003
7. R Mahajan, “futures & option introduction to equity derivatives” Vision Books NewDelhi, 2002
8. SEBI Bulletin, Securities and Exchange Board of India, 2002 – 2011
9. S.P. Gupta, “Financial derivatives Theory, Concept and Problems” 2005, Prentice hall ofIndia Private Limited,
2005
10. NISM-Series-VIII: Equity Derivatives Certification Examination” National Institute of Securities Markets 2015

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