FINANCIAL DERIVATIVES

Option Trading Strategies

An analysis of various strategies and their applicability in various situations
Akshit Kumar Gupta Omkar Sushil Samvatsar Sudesh Jain Vedank Parashar 20-Sep-10

Contents
Objective & basics ......................................................................................................................................... 3 Introduction to Option Strategies ................................................................................................................. 3 Long Combo .............................................................................................................................................. 3 Long Straddle ............................................................................................................................................ 4 Short Straddle ........................................................................................................................................... 4 Long Strangle ............................................................................................................................................ 5 Short Strangle ........................................................................................................................................... 5 Collar ......................................................................................................................................................... 6 Bull Call Spread Strategy ........................................................................................................................... 7 Long Call Butterfly ..................................................................................................................................... 7 Short Call Butterfly .................................................................................................................................... 8 Long Call Condor ....................................................................................................................................... 9 Short Call Condor ...................................................................................................................................... 9 The Flow ...................................................................................................................................................... 10 The Model ................................................................................................................................................... 11 Understanding the Document .................................................................................................................... 11 Views & Strategies ...................................................................................................................................... 13 Case 1 ...................................................................................................................................................... 13 Short Strangle ..................................................................................................................................... 13 Short Straddle ..................................................................................................................................... 14 Long Call Butterfly ............................................................................................................................... 14 Long Call Condor ................................................................................................................................. 16 Wrong View - Case 1 ........................................................................................................................... 18 Case 2 ...................................................................................................................................................... 19 Bear Put Spread .................................................................................................................................. 19 Bear Call Spread .................................................................................................................................. 20 Wrong View - Case 2 ........................................................................................................................... 20 Case 3 ...................................................................................................................................................... 22 Bull Put Spread .................................................................................................................................... 22 1|Page

Bull Call Spread ................................................................................................................................... 22 Long Combo ........................................................................................................................................ 23 Collar ................................................................................................................................................... 24 Wrong View - Case 3 ........................................................................................................................... 25 Case 4 ...................................................................................................................................................... 27 Case 4A................................................................................................................................................ 27 Case 4 B ............................................................................................................................................... 32 Wrong View - Case 4 ........................................................................................................................... 37 General conclusion Case 4 ............................................................................................................... 38 Case 5 ...................................................................................................................................................... 39 Long Straddle ...................................................................................................................................... 39 Long Strangle ...................................................................................................................................... 40 Short Call Butterfly .............................................................................................................................. 41 Short Call Condor ................................................................................................................................ 42 Wrong View - Case 5 ........................................................................................................................... 44 Case 6 ...................................................................................................................................................... 46 Short Strangle ..................................................................................................................................... 46 Short Straddle ..................................................................................................................................... 47 Long Call Butterfly ............................................................................................................................... 47 Long Call Condor ................................................................................................................................. 49 Wrong View - Case 6 ........................................................................................................................... 51 Conclusion ................................................................................................................................................... 52

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Objective & basics

Objective is to apply different option strategies based on the views & validate the results. Also, understanding the significance/insignificance of view when adopting strategy is to be done. Different views have been taken at different points of time. Based on them, different option strategies have been tested on actual data from NSE. We have considered only Index Options as they are European i.e for study our underlying asset is NIFTY index.

Introduction to Option Strategies

(Source: The description of the various option strategies has been taken directly from the NCFM modules from the NSE website. (Link: http://www.nseindia.com/content/ncfm/sm_otsm.zip)) Fundamentals of Futures and Options Markets - John C. Hull (Ch- 10) has also been referred for understanding of the trading strategies.

Long Combo
Sell OTM Put, Buy OTM Call

A Long Combo is a Bullish strategy. If an investor is expecting the price of a stock to move up he can do a Long Combo strategy. It involves selling an OTM (lower strike) Put and buying an OTM (higher strike) Call. This strategy simulates the action of buying a stock (or a future) but at a fraction of the stock price. It is an inexpensive trade, similar in pay-off to Long Stock, except there is a gap between the strikes (please see the payoff diagram). As the stock price rises the strategy starts making profits.

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Long Straddle
Buy call; Buy put with same maturity

A Straddle is a volatility strategy and is used when the stock price / index is expected to show large movements. This strategy involves buying a call as well as put on the same stock / index for the same maturity and strike price, to take advantage of a movement in either direction, a soaring or plummeting value of the stock / index. If the price of the stock / index increases, the call is exercised while the put expires worthless and if the price of the stock / index decreases, the put is exercised, the call expires worthless. Either way if the stock / index show volatility to cover the cost of the trade, profits are to be made. With Straddles, the investor is direction neutral. All that he is looking out for is the stock / index to break out exponentially in either direction.

Short Straddle
Sell Call; sell put with same maturity

A Short Straddle is the opposite of Long Straddle. It is a strategy to be adopted when the investor feels the market will not show much movement. He sells a Call and a Put on the same stock / index for the same maturity and strike price. It creates a net income for the investor. If the stock / index do not move much in either direction, the investor retains the Premium as neither the Call nor the Put will be exercised. However, incase the stock / index moves in either direction, up or down significantly, the investors losses can be significant. So this is a risky strategy and should be carefully adopted and only when the expected volatility in the market is limited. If the stock / index value stays close to the strike price on expiry of the contracts, maximum gain, which is the Premium received is made.

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Long Strangle
Buy OTM put and buy OTM call

A Strangle is a slight modification to the Straddle to make it cheaper to execute. This strategy involves the simultaneous buying of a slightly out-of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same underlying stock / index and expiration date. Here again the investor is directional neutral but is looking for an increased volatility in the stock / index and the prices moving significantly in either direction. Since OTM options are purchased for both Calls and Puts it makes the cost of executing a Strangle cheaper as compared to a Straddle, where generally ATM strikes are purchased. Since the initial cost of a Strangle is cheaper than a Straddle, the returns could potentially be higher. However, for a Strangle to make money it would require greater movement on the upside or downside for the stock / index than it would for a Straddle. As with a Straddle, the strategy has a limited downside (i.e. the Call and the Put premium) and unlimited upside potential.

Short Strangle
Sell OTM put; Sell OTM call

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A Short Strangle is a slight modification to the Short Straddle. It tries to improve the profitability of the trade for the Seller of the options by widening the breakeven points so that there is a much greater movement required in the underlying stock / index, for the Call and Put option to be worth exercising. This strategy involves the simultaneous selling of a slightly out-of-the-money (OTM) put and a slightly out-of-the-money (OTM) call of the same underlying stock and expiration date. This typically means that since OTM call and put are sold, the net credit received by the seller is less as compared to a Short Straddle, but the break even points are also widened. The underlying stock has to move significantly for the Call and the Put to be worth exercising. If the underlying stock does not show much of a movement, the seller of the Strangle gets to keep the premium.

Collar
Buy ATM put, sell OTM call A Collar is similar to Covered Call (Strategy 6) but involves another leg buying a Put to insure against the fall in the price of the stock. It is a Covered Call with a limited risk. So a Collar is buying a stock, insuring against the downside by buying a Put and then financing (partly) the Put by selling a Call. The put generally is ATM and the call is OTM having the same expiration month and must be equal in number of shares. This is a low risk strategy since the Put prevents downside risk. However, do not expect unlimited rewards since the Call prevents that. It is a strategy to be adopted when the investor is conservatively bullish.

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Bull Call Spread Strategy

Buy ITM Call Option, Sell OTM Call Option

A bull call spread is constructed by buying an in-the-money (ITM) call option, and selling another out-ofthe-money (OTM) call option. Often the call with the lower strike price will be in-the-money while the Call with the higher strike price is out-of-the-money. Both calls must have the same underlying security and expiration month. The net effect of the strategy is to bring down the cost and breakeven on a Buy Call (Long Call) Strategy. This strategy is exercised when investor is moderately bullish to bullish, because the investor will make a profit only when the stock price / index rise. If the stock price falls to the lower (bought) strike, the investor makes the maximum loss (cost of the trade) and if the stock price rises to the higher (sold) strike, the investor makes the maximum profit.

Long Call Butterfly

Sell 2 ATM Call Options, Buy 1 ITM Call Option And Buy 1 OTM Call Option.

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A Long Call Butterfly is to be adopted when the investor is expecting very little movement in the stock price / index. The investor is looking to gain from low volatility at a low cost. The strategy offers a good risk / reward ratio, together with low cost. A long butterfly is similar to a Short Straddle except your losses are limited. The strategy can be done by selling 2 ATM Calls, buying 1 ITM Call, and buying 1 OTM Call options (there should be equidistance between the strike prices). The result is positive incase the stock / index remains range bound. The maximum reward in this strategy is however restricted and takes place when the stock / index is at the middle strike at expiration. The maximum losses are also limited.

Short Call Butterfly

Buy 2 ATM Call Options, Sell 1 ITM Call Option And Sell 1 OTM Call Option.

A Short Call Butterfly is a strategy for volatile markets. It is the opposite of Long Call Butterfly, which is a range bound strategy. The Short Call Butterfly can be constructed by Selling one lower striking in-themoney Call, buying two at-the-money Calls and selling another higher strike out-of-the-money Call, giving the investor a net credit (therefore it is an income strategy). There should be equal distance between each strike. The resulting position will be profitable in case there is a big move in the stock / index. The maximum risk occurs if the stock / index is at the middle strike at expiration. The maximum profit occurs if the stock finishes on either side of the upper and lower strike prices at expiration. However, this strategy offers very small returns when compared to straddles, strangles with only slightly less risk.

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Long Call Condor

Buy 1 ITM Call Option (Lower Strike), Sell 1 ITM Call Option (Lower Middle), Sell 1 OTM Call Option (Higher Middle) and Buy 1 OTM Call Option (Higher Strike)

A Long Call Condor is very similar to a long butterfly strategy. The difference is that the two middle sold options have different strikes. The profitable area of the pay off profile is wider than that of the Long Butterfly (see pay-off diagram). The strategy is suitable in a range bound market. The Long Call Condor involves buying 1 ITM Call (lower strike), selling 1 ITM Call (lower middle), selling 1 OTM call (higher middle) and buying 1 OTM Call (higher strike). The long options at the outside strikes ensure that the risk is capped on both the sides. The resulting position is profitable if the stock / index remains range bound and shows very little volatility. The maximum profits occur if the stock finishes between the middle strike prices at expiration.

Short Call Condor

Short 1 ITM Call Option (Lower Strike), Long 1 ITM Call Option (Lower Middle), Long 1 OTM Call Option (Higher Middle), Short 1 OTM Call Option (Higher Strike).

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A Short Call Condor is very similar to a short butterfly strategy. The difference is that the two middle bought options have different strikes. The strategy is suitable in a volatile market. The Short Call Condor involves selling 1 ITM Call (lower strike), buying 1 ITM Call (lower middle), buying 1 OTM call (higher middle) and selling 1 OTM Call (higher strike). The resulting position is profitable if the stock / index shows very high volatility and there is a big move in the stock / index. The maximum profits occur if the stock / index finish on either side of the upper or lower strike prices at expiration.

The Flow
I. Six different views on the NIFTY index were taken. 1. 2. 3. 4. 5. 6. II. III. No significant movement in index from current value Bearish Bullish Highly Volatile, uncertain about the direction Index expected to lie outside certain range Index expected to lie within certain range

The Nifty index values were analyzed to identify the periods where these views were actually valid. All the strategies corresponding/suitable to these views were taken and payoffs calculated for these strategies using actual data for option prices (See the section on The Model). The view was taken for the expiry date for which the option is available. For each of the views taken, opposite view was also assumed for the corresponding period & one of the strategies suitable for this opposite view was implemented and tested.

IV.

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The Model
A modular approach has been taken where programmable excel model for calculating payoffs for call and put option were created. These models for the calculation of payoffs were used in the calculation of overall payoffs for different strategies used in accordance to the views. The following are the prototype models made for calculating the payoffs in call and put option.

Prototype for Call Option Call Option Spot Price Strike Price Option Price Buy or Sell Profit 2697.05 4850 19.95 0 -19.95

Prototype for Put Option Put Option Spot Price Strike Price Option Price Buy or Sell Profit

2697.05 3750 47.05 1 -1005.9

The spot price of the NIFTY index value on the particular date is entered and the option price on the particular date for a particular strike price is entered. The strike price is chosen according to the requirements of the strategy which requires the call or put to be in-the-money or out-of-the-money. Buy or sell is indicated by the binary value of 0 and 1 where buy is indicated by entering 0 and sell by indicating 1. It then calculates the profit value by using the excel formula.

Strategies that have been used are combination of put options, call options and underlying market index. These have been created by using above mentioned prototypes.

Understanding the Document

The following part of the document is structured into 6 cases as mentioned above. For each case following structure has been followed (Words in italics here indicate various sections in each case) View: 11 | P a g e

This indicates the view taken.

Time T0= XYZ: S&P CNX NIFTY Index = XYZ Here T0 indicates the time when view and position will be taken. S&P CNX Nifty Index at T0 is mentioned alongside.

Applicable option strategy This section denotes the strategies that are applicable for the mentioned view. Alongside this available and applicable option with their strike prices & option prices at T0 have been mentioned. The table that follows shows the actual implementation of the strategy using the prototypes mentioned above.

Time T1= XYZ: S&P CNX NIFTY Index = XYZ Time T1 indicates the expiration date of the option. The table that follows shows the actual implementation of the strategy using the prototypes mentioned above. For each case wrong view & one strategy implementation based on this wrong view has been done. Based on these conclusions have been drawn.

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Views & Strategies

Case 1
View: No significant movement in index from current value in next 15 days Time T0=14-07-2010: S&P CNX NIFTY Index = 5386.15 Applicable option strategy: Short Strangle, Short Straddle, Long Call Butterfly, Long Call Condor (Time T1=29-07-2010: S&P CNX NIFTY Index = 5408.9) Short Strangle Time T0=14-07-2010: S&P CNX NIFTY Index = 5386.15 Available options: Call Option X= 5400, Option price= 64.95 Put Option X= 5300, Option price=43.20 This strategy involves simultaneous selling of out of money put and call on the same underlying asset. So the above mentioned options have been selected. Spot Price 5386.15 Put Option Spot Price 5386.15 Strike Price 5300 Option Price 43.2 Buy or Sell 1 Profit 43.2

Call Option Spot Price 5386.15 Strike Price 5400 Option Price 64.95 Buy or Sell 1 Profit 64.95

Time T1=29-07-2010: S&P CNX NIFTY Index = 5408.9 Spot Price 5408.9 Put Option Spot Price 5408.9 Strike Price 5300 Option Price 43.2 Buy or Sell 1 Profit 43.2

Call Option Spot Price 5408.9 Strike Price 5400 Option Price 64.95 Buy or Sell 1 Profit 56.05 Net Profit 99.25

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Short Straddle Time T0=14-07-2010: S&P CNX NIFTY Index = 5386.15 Available options: Call Option X= 5400, Option price= 64.95 Put Option X= 5400, Option price=78.15 Call and put on the same underlying asset needs to be sold & hence above mentioned options have been selected. Spot Price Strike Price 5386.15 5400

Same Strike Price Put Option Spot Price 5386.15 Strike Price 5400 Option Price 78.15 Buy or Sell 1 Profit 64.3

Call Option Spot Price 5386.15 Strike Price 5400 Option Price 64.95 Buy or Sell 1 Profit 64.95

Time T1=29-07-2010:S&P CNX NIFTY Index = 5408.9 Spot Price Strike Price 5408.9 5400

Same Strike Price Put Option Spot Price 5408.9 Strike Price 5400 Option Price 78.15 Buy or Sell 1 Profit 78.15

Call Option Spot Price 5408.9 Strike Price 5400 Option Price 64.95 Buy or Sell 1 Profit 56.05 Net Profit 134.2

Long Call Butterfly Time T0=14-07-2010: S&P CNX NIFTY Index = 5386.15 Available options: Call Option X= 5400, Option price= 64.95 14 | P a g e

Call Option X= 5100, Option price= 296.25 Call Option X= 5700, Option price= 2.4 The strategy involves selling 2 ATM calls, buying one ITM call & buying 1 OTM call option. Based on this above mentioned options have been selected. Spot price 5386.15

Call Option Spot Price 5386.15 Strike Price 5400 Option Price 64.95 Buy or Sell 1 Profit 64.95

Strike Price 5400 Option Price 64.95 2 call options sell

Call Option Spot Price 5386.15 Strike Price 5400 Option Price 64.95 Buy or Sell 1 Profit 64.95

Call Option Spot Price 5386.15 Strike Price 5100 Option Price 296.25 Buy or Sell 0 Profit -10.1

Call Option Spot Price 5386.15 Strike Price 5700 Option Price 2.4 Buy or Sell 0 Profit -2.4

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Time T1=29-07-2010:S&P CNX NIFTY Index = 5408.9

Spot price

5408.9

Call Option Spot Price 5408.9 Strike Price 5400 Option Price 64.95 Buy or Sell 1 Profit 56.05

Strike Price 5400 Option Price 64.95 2 call options sell

Call Option Spot Price 5408.9 Strike Price 5400 Option Price 64.95 Buy or Sell 1 Profit 56.05

Call Option Spot Price 5408.9 Strike Price 5100 Option Price 296.25 Buy or Sell 0 Profit 12.65 Net Profit 122.35

Call Option Spot Price 5408.9 Strike Price 5700 Option Price 2.4 Buy or Sell 0 Profit -2.4

Long Call Condor Time T0=14-07-2010: S&P CNX NIFTY Index = 5386.15 Available options: Call Option X= 5000, Option price= 393.25 Call Option X= 5200, Option price= 207.10 Call Option X= 5500, Option price= 25.35 16 | P a g e

Call Option X= 5600, Option price= 6.9 This strategy involves buying 1 ITM call(lower strike), selling 1 ITM call(lower middle), selling 1 OTM call (higher middle) and buying 1 OTM call (higher call). Hence above mentioned options have been selected. Spot price 5386.15 Call Option Spot Price 5386.15 Strike Price 5200 Option Price 207.1 Buy or Sell 1 Profit 20.95

Call Option Spot Price 5386.15 Strike Price 5000 Option Price 393.25 Buy or Sell 0 Profit -7.1

Call Option Spot Price 5386.15 Strike Price 5500 Option Price 25.35 Buy or Sell 1 Profit 25.35

Call Option Spot Price 5386.15 Strike Price 5600 Option Price 6.9 Buy or Sell 0 Profit -6.9

Time T1=29-07-2010:S&P CNX NIFTY Index = 5408.9 Spot price 5408.9 Call Option Spot Price 5408.9 Strike Price 5200 Option Price 207.1 Buy or Sell 1 Profit -1.8

Call Option Spot Price 5408.9 Strike Price 5000 Option Price 393.25 Buy or Sell 0 Profit 15.65

Call Option Spot Price 5408.9 Strike Price 5500 Option Price 25.35 Buy or Sell 1 Profit 25.35

Call Option Spot Price 5408.9 Strike Price 5600 Option Price 6.9 Buy or Sell 0 Profit -6.9

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Net Profit

32.3

Wrong View - Case 1 View: Significant movement in index from current value in next 15 days Time T0=14-07-2010: S&P CNX NIFTY Index = 5386.15 Applicable option strategy: Long Strangle, Long Straddle, Short Call Butterfly, Short Call Condor Implemented option strategy: Long Strangle (Time T1=29-07-2010: S&P CNX NIFTY Index = 5408.9) Long Strangle Time T0=14-07-2010: S&P CNX NIFTY Index = 5386.15 Available options: Call Option X= 5400, Option price= 64.95 Put Option X= 5300, Option price=43.20 Spot Price 5386.15 Put Option Spot Price 5386.15 Strike Price 5300 Option Price 43.2 Buy or Sell 0 Profit -43.2

Call Option Spot Price 5386.15 Strike Price 5400 Option Price 64.95 Buy or Sell 0 Profit -64.95

Time T1=29-07-2010: S&P CNX NIFTY Index = 5408.9 Spot Price 5408.9 Put Option Spot Price 5408.9 Strike Price 5300 Option Price 43.2 Buy or Sell 0 Profit -43.2

Call Option Spot Price 5408.9 Strike Price 5400 Option Price 64.95 Buy or Sell 0 Profit -56.05 Net Profit -99.25

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Case 2
View: Decline in index expected in next one & half month. Time T0=22-09-2008: S&P CNX NIFTY Index = 4223.05 Applicable option strategy: Bear Call Spread, Bear Put Spread (Time T1=29-10-2008: S&P CNX NIFTY Index = 2697.05) Bear Put Spread Time T0=22-09-2008: S&P CNX NIFTY Index = 4223.05 Available options: Put option X= 3750, Option price= 47.05 Put Option X= 4850, Option price=700 This strategy involves buying 1 ITM put option & selling 1 OTM put option. Hence above mentioned options have been selected. Put Option Spot Price 4223.05 Strike Price 3750 Option Price 47.05 Buy or Sell 1 Profit 47.05 Time T1=29-10-2008: S&P CNX NIFTY Index = 2697.05 Put Option Spot Price 4223.05 Strike Price 4850 Option Price 700 Buy or Sell 0 Profit -73.05

Put Option Spot Price 2697.05 Strike Price 3750 Option Price 47.05 Buy or Sell 1 Profit -1005.9 Net Profit 447.05

Put Option Spot Price 2697.05 Strike Price 4850 Option Price 700 Buy or Sell 0 Profit 1452.95

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Bear Call Spread

Time T0=22-09-2008: S&P CNX NIFTY Index = 4223.05 Available options: Call Option X= 4850, Option price=19.95 Call Option X= 3850, Option price=376.1

This strategy involves buying one OTM call option & selling one ITM call option. Call Option Spot Price 4223.05 Strike Price 4850 Option Price 19.95 Buy or Sell 0 Profit -19.95 Call Option Spot Price 4223.05 Strike Price 3850 Option Price 376.1 Buy or Sell 1 Profit 3.05

Time T1=29-10-2008: S&P CNX NIFTY Index = 2697.05

Call Option Spot Price 2697.05 Strike Price 4850 Option Price 19.95 Buy or Sell 0 Profit -19.95 Net Profit 356.15

Call Option Spot Price 2697.05 Strike Price 3850 Option Price 376.1 Buy or Sell 1 Profit 376.1

Wrong View - Case 2 View: Rise in index expected in next one & half month. Time T0=22-09-2008: S&P CNX NIFTY Index = 4223.05 Applicable option strategy: Bull Call Spread, Bull Put Spread, Long Combo, Collar Implemented option strategy: Bull Put Spread (Time T1=29-10-2008: S&P CNX NIFTY Index = 2697.05) 20 | P a g e

Bull Put Spread Time T0=22-09-2008: S&P CNX NIFTY Index = 4223.05 Available options: Put option X= 3750, Option price= 47.05 Put Option X= 4000, Option price=103.2 Spot Price 4223.05 Put Option Spot Price 4223.05 Strike Price 3750 Option Price 47.05 Buy or Sell 0 Profit -47.05

Put Option Spot Price 4223.05 Strike Price 4000 Option Price 103.2 Buy or Sell 1 Profit 103.2

Time T1=29-10-2008: S&P CNX NIFTY Index = 2697.05 Spot Price 2697.05 Put Option Spot Price 2697.05 Strike Price 3750 Option Price 47.05 Buy or Sell 0 Profit 1005.9

Put Option Spot Price 2697.05 Strike Price 4000 Option Price 103.2 Buy or Sell 1 Profit -1199.75 Net Profit -193.85

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Case 3
View: Increase in index expected in next 2 months Time T0=03-11-2009: S&P CNX NIFTY Index = 4563.90 Applicable option strategy: Bull Call Spread, Bull Put Spread, Long Combo, Collar (Time T1=31-12-2009: S&P CNX NIFTY Index = 5201.05) Bull Put Spread

Time T0=03-11-2009: S&P CNX NIFTY Index = 4563.90 Available options: Put Option X= 4000, Option price= 57.1 Put Option X= 3000, Option price=4.5 For this strategy lower strike put purchased is further OTM than higher strike put. Based on this above mentioned options have been selected. Put Option Spot Price 4563.9 Strike Price 4000 Option Price 57.1 Buy or Sell 1 Profit 57.1 Put Option Spot Price 4563.9 Strike Price 3000 Option Price 4.5 Buy or Sell 0 Profit -4.5

Time T1=31-12-2009: S&P CNX NIFTY Index = 5201.05 Put Option Spot Price 5201.05 Strike Price 4000 Option Price 57.1 Buy or Sell 1 Profit 57.1 Net Profit 52.6 Put Option Spot Price 5201.05 Strike Price 3000 Option Price 4.5 Buy or Sell 0 Profit -4.5

Bull Call Spread Time T0=03-11-2009: S&P CNX NIFTY Index = 4563.90

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Available options: Call Option X= 3000, Option price= 1550 Call Option X= 5500, Option price=10.15 Here 1 ITM call should be bought and 1 OTM call be sold. Options above have been selected accordingly. Call Option Spot Price 4563.9 Strike Price 3000 Option Price 1550 Buy or Sell 0 Profit 13.9 Call Option Spot Price 4563.9 Strike Price 5500 Option Price 10.15 Buy or Sell 1 Profit 10.15

Time T1=31-12-2009: S&P CNX NIFTY Index = 5201.05

Call Option Spot Price 5201.05 Strike Price 3000 Option Price 1550 Buy or Sell 0 Profit 651.05 Net Profit 661.2

Call Option Spot Price 5201.05 Strike Price 5500 Option Price 10.15 Buy or Sell 1 Profit 10.15

Long Combo Time T0=03-11-2009: S&P CNX NIFTY Index = 4563.90 Available options: Call Option X= 5000, Option price= 59.8 Put Option X= 2500, Option price=2 Here OTM put (lower strike) be sold & OTM call (higher strike) be bought. Based on this above option prices have been selected. (Here the design should be such that strike price selected is less than expected rise in the index) Call Option Spot Price 4563.9 Strike Price 5000 Option Price 59.8 Buy or Sell 0 23 | P a g e Put Option Spot Price 4563.9 Strike Price 2500 Option Price 2 Buy or Sell 1

Profit

-59.8

Profit

Time T1=31-12-2009: S&P CNX NIFTY Index = 5201.05

Call Option Spot Price 5201.05 Strike Price 5000 Option 59.8 Price Buy or Sell 0 Profit 141.25 Net Profit 143.25

Put Option Spot Price 5201.05 Strike Price 2500 Option 2 Price Buy or Sell 1 Profit 2

Collar Time T0=03-11-2009: S&P CNX NIFTY Index = 4563.90

Available options: Call Option X= 5800, Option price= .3 Put Option X= 4600, Option price=217.5 Stock price = 4563.9 (same as Nifty index value) Strategy requires ATM put & OTM call. Hence above mentioned options have been selected. Stock Purchase Price of Stock 4563.9 Profit 0 Call Option Spot Price 4563.9 Strike Price 5800 Option Price 0.3 Buy or Sell 1 Profit 0.3 Put Option Spot Price 4563.9 Strike Price 4600 Option Price 217.5 Buy or Sell 0 Profit -181.4

Time T1=31-12-2009: S&P CNX NIFTY Index = 5201.05

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Stock Purchase Price of Stock 4563.9 Profit 637.15

Call Option Spot Price 5201.05 Strike Price 5800 Option Price 0.3 Buy or Sell 1 Profit 0.3

Put Option Spot Price 5201.05 Strike Price 4600 Option Price 217.5 Buy or Sell 0 Profit -217.5

Total Investment Profit

4781.1 419.95

Wrong View - Case 3 View: Decrease in index expected in next 2 months Time T0=03-11-2009: S&P CNX NIFTY Index = 4563.90 Applicable option strategy: Bear Call Spread, Bear Put Spread Implemented option strategy: Bear Put Spread (Time T1=31-12-2009: S&P CNX NIFTY Index = 5201.05)

Bear Put Spread Time T0=03-11-2009: S&P CNX NIFTY Index = 4563.90 Available options: Put Option X= 4000, Option price= 57.1 Put Option X= 5000, Option price=489.60 Spot Price 4563.9 Put Option Spot Price 4563.9 Strike Price 4000 Option Price 57.1 Buy or Sell 1 Profit 57.1

Put Option Spot Price 4563.9 Strike Price 5000 Option Price 489.6 Buy or Sell 0 Profit -53.5

Time T1=31-12-2009: S&P CNX NIFTY Index = 5201.05 Spot Price 5201.05

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Put Option Spot Price 5201.05 Strike Price 5000 Option Price 489.6 Buy or Sell 0 Profit -489.6 Net Profit -432.5

Put Option Spot Price 5201.05 Strike Price 4000 Option Price 57.1 Buy or Sell 1 Profit 57.1

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Case 4
View: High uncertainty expected. To study this case, we will take two subcases where index increased from current value & decreased from current value Case 4A High uncertainty is expected till announcement of results (16-05-2009) Actual index increased Time T0=31-03-2009 :S&P CNX NIFTY Index = 3020.95 Applicable option strategy: Long straddle, Long strangle, Short call butterfly, Short call condor (Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1) Long Straddle Time T0=31-03-2009: S&P CNX NIFTY Index = 3020.95 Available options: Call Option Bought X= 3000, Option price= 202.65 Put Option Bought X= 3000, Option price=192.7 Strategy involves buying a call as well as a put on the same index at the same strike price. Spot Price Strike Price 3020.95 3000

Same Strike Price Put Option Spot Price 3020.95 Strike Price 3000 Option Price 192.7 Buy or Sell 0 Profit -192.7

Call Option Spot Price 3020.95 Strike Price 3000 Option Price 202.65 Buy or Sell 0 Profit -181.7

Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1

Spot Price Strike Price

4337.1 3000

Same Strike Price

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Call Option Spot Price 4337.1 Strike Price 3000 Option Price 202.65 Buy or Sell 0 Profit 1134.45 Net Profit 941.75

Put Option Spot Price 4337.1 Strike Price 3000 Option Price 192.7 Buy or Sell 0 Profit -192.7

Long Strangle

Time T0=31-03-2009: S&P CNX NIFTY Index = 3020.95 Available options: Call Option X= 3700, Option price=51.10 Put Option X= 2500, Option price=52.40 Strategy involves 1 OTM put and 1 OTM call. Spot Price 3020.95 Put Option Spot Price 3020.95 Strike Price 2500 Option Price 52.4 Buy or Sell 0 Profit -52.4

Call Option Spot Price 3020.95 Strike Price 3700 Option Price 51.1 Buy or Sell 0 Profit -51.1

Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1 Spot Price 4337.1 Put Option Spot Price 4337.1 Strike Price 2500 Option Price 52.4 Buy or Sell 0 Profit -52.4

Call Option Spot Price 4337.1 Strike Price 3700 Option Price 51.1 Buy or Sell 0 Profit 586 28 | P a g e

Net Profit

533.6

Short Call Butterfly

Time T0=31-03-2009: S&P CNX NIFTY Index = 3020.95 Available options: Two Call Options bought X= 3000, Option price=202.65 Sold Call Option X= 2800, Option price=339.85 Sold Call Option X=3200, Option price=109.80 This is constructed by selling one lower striking ITM call, buying two ATM calls and selling another OTM call. Based on this above options have been selected. Spot price 3020.95

Call Option Spot Price 3020.95 Strike Price 3000 Option Price 202.65 Buy or Sell 0 Profit -181.7

Strike Price Option Price 2 call options bought

3000 202.65

Call Option Spot Price 3020.95 Strike Price 3000 Option Price 202.65 Buy or Sell 0 Profit -181.7

Call Option Spot Price 3020.95 Strike Price 2800 29 | P a g e

Call Option Spot Price 3020.95 Strike Price 3200

Option Price Buy or Sell Profit

339.85 1 118.9

Option Price Buy or Sell Profit

109.8 1 109.8

Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1 Spot price 4337.1

Call Option Spot Price Strike Price Option Price Buy or Sell Profit 4337.1 3000 202.65 0 1134.45

Strike Price Option Price 2 call options bought

3000 202.65

Call Option Spot Price 4337.1 Strike Price 3000 Option Price 202.65 Buy or Sell 0 Profit 1134.45

Call Option Spot Price 4337.1 Strike Price 2800 Option Price 339.85 Buy or Sell 1 Profit -1197.25 Net Profit 44.35

Call Option Spot Price 4337.1 Strike Price 3200 Option Price 109.8 Buy or Sell 1 Profit -1027.3

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Short Call Condor Time T0=31-03-2009: S&P CNX NIFTY Index = 3020.95 Available options: Sold Call OptionX= 2800, Option price=339.85 Bought Call Option X= 2900, Option price=289.95 Bought Call Option X= 3100, Option price=154.20 Sold Call Option X=3200, Option price=109.80 This strategy requires selling 1 ITM call, buying 1 ITM call, buying 1 OTM call and selling 1 OTM call. Spot price 3020.95 Call Option Spot Price 3020.95 Strike Price 2900 Option Price 289.95 Buy or Sell 0 Profit -169

Call Option Spot Price 3020.95 Strike Price 2800 Option Price 339.85 Buy or Sell 1 Profit 118.9

Call Option Spot Price 3020.95 Strike Price 3100 Option Price 154.2 Buy or Sell 0 Profit -154.2

Call Option Spot Price 3020.95 Strike Price 3200 Option Price 109.8 Buy or Sell 1 Profit 109.8

Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1 Spot price 4337.1 Call Option Spot Price 4337.1 Strike Price 2900 Option Price 289.95 Buy or Sell 0

Call Option Spot Price 4337.1 Strike Price 2800 Option Price 339.85 Buy or Sell 1 31 | P a g e

Profit

-1197.25

Profit

1147.15

Call Option Spot Price 4337.1 Strike Price 3100 Option Price 154.2 Buy or Sell 0 Profit 1082.9 Net profit 5.5

Call Option Spot Price 4337.1 Strike Price 3200 Option Price 109.8 Buy or Sell 1 Profit -1027.3

Case 4 B View: High uncertainty is expected till announcement of results (13-05-2004) Actual index decreased Time T0=20-04-2004 : S&P CNX NIFTY Index = 1844.25 Applicable option strategy: Long straddle, Long strangle, Short call butterfly, Short call condor (Time T1=27-05-2004: S&P CNX NIFTY Index = 1586.4) Long Straddle Time T0=20-04-2004 S&P CNX NIFTY Index = 1844.25 Available options: Call Option bought X= 1900, Option price= 33.2 Put Option Bought X= 1900, Option price=90 Spot Price Strike Price 1844.25 1900

Same Strike Price Put Option Spot Price 1844.25 Strike Price 1900 Option Price 90 Buy or Sell 0 Profit -34.25

Call Option Spot Price 1844.25 Strike Price 1900 Option Price 33.2 Buy or Sell 0 Profit -33.2

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Time T1=27-05-2004: S&P CNX NIFTY Index = 1586.4

Spot Price Strike Price

1586.4 1900

Same Strike Price Put Option Spot Price 1586.4 Strike Price 1900 Option Price 90 Buy or Sell 0 Profit 223.6

Call Option Spot Price 1586.4 Strike Price 1900 Option Price 33.2 Buy or Sell 0 Profit -33.2 Net Profit 190.4

Long Strangle

Time T0=20-04-2004 S&P CNX NIFTY Index = 1844.25 Available options: Call Option X= 1900, Option price=33.2 Put Option X= 1800, Option price=35.75 Spot Price 1844.25 Put Option Spot Price 1844.25 Strike Price 1800 Option Price 35.75 Buy or Sell 0 Profit -35.75

Call Option Spot Price 1844.25 Strike Price 1900 Option Price 33.2 Buy or Sell 0 Profit -33.2

Time T1=27-05-2004: S&P CNX NIFTY Index = 1586.4 Spot Price 1586.4 Put Option Spot Price 1586.4

Call Option Spot Price 1586.4 33 | P a g e

Strike Price Option Price Buy or Sell Profit Net Profit

1900 33.2 0 -33.2 144.65

Strike Price 1800 Option Price 35.75 Buy or Sell 0 Profit 177.85

Short Call Butterfly

Time T0=20-04-2004 S&P CNX NIFTY Index = 1844.25 Available options: Two Call Options bought X= 1840, Option price=59.85 Sold Call Option X= 1790, Option price=117.05 Sold Call Option X=1890, Option price=117.2 Spot price 1844.25

Call Option Spot Price 1844.25 Strike Price 1840 Option Price 59.85 Buy or Sell 0 Profit -55.6

Strike Price Option Price 2 call options bought

1840 59.85

Call Option Spot Price 1844.25 Strike Price 1840 Option Price 59.85 Buy or Sell 0 Profit -55.6

Call Option Spot Price 1844.25 34 | P a g e

Call Option Spot Price 1844.25

Strike Price Option Price Buy or Sell Profit

1790 117.05 1 62.8

Strike Price Option Price Buy or Sell Profit

1890 117.2 1 117.2

Time T1=27-05-2004: S&P CNX NIFTY Index = 1586.4 Spot price 1586.4

Call Option Spot Price 1586.4 Strike Price 1840 Option Price 59.85 Buy or Sell 0 Profit -59.85

Strike Price Option Price 2 call options bought

1840 59.85

Call Option Spot Price 1586.4 Strike Price 1840 Option Price 59.85 Buy or Sell 0 Profit -59.85

Call Option Spot Price 1586.4 Strike Price 1790 Option Price 117.05 Buy or Sell 1 Profit 117.05 Net Profit 114.55

Call Option Spot Price Strike Price Option Price Buy or Sell Profit

1586.4 1890 117.2 1 117.2

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Short Call Condor Time T0=20-04-2004 S&P CNX NIFTY Index = 1844.25 Available options: Sold Call Option X= 1750, Option price=135 Bought Call Option X= 1780, Option price=58 Bought Call Option X= 1880, Option price=41.9 Sold Call Option X=1910, Option price=33.5

Spot price

1844.25 Call Option Spot Price 1844.25 Strike Price 1780 Option Price 58 Buy or Sell 0 Profit 6.25

Call Option Spot Price 1844.25 Strike Price 1750 Option Price 135 Buy or Sell 1 Profit 40.75

Call Option Spot Price 1844.25 Strike Price 1880 Option Price 41.9 Buy or Sell 0 Profit -41.9

Call Option Spot Price 1844.25 Strike Price 1910 Option Price 33.5 Buy or Sell 1 Profit 33.5

Time T1=27-05-2004: S&P CNX NIFTY Index = 1586.4 Spot price 1586.4 Call Option Spot Price 1586.4 Strike Price 1780

Call Option Spot Price 1586.4 Strike Price 1750 36 | P a g e

Option Price Buy or Sell Profit

135 1 135

Option Price Buy or Sell Profit

58 0 -58

Call Option Spot Price 1586.4 Strike Price 1880 Option Price 41.9 Buy or Sell 0 Profit -41.9 Net profit 68.6

Call Option Spot Price 1586.4 Strike Price 1910 Option Price 33.5 Buy or Sell 1 Profit 33.5

Wrong View - Case 4 View: Prices likely to continue at current range Time T0=31-03-2009 : S&P CNX NIFTY Index = 3020.95 Applicable option strategy: Short straddle, Short strangle, Long call butterfly, Long call condor Implemented option strategy: Short Straddle (Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1) Short Straddle Time T0=31-03-2009: S&P CNX NIFTY Index = 3020.95 Available options: Call Option X= 3000, Option price= 202.65 Put Option X= 3000, Option price=192.7 Spot Price Strike Price 3020.95 3000

Same Strike Price Put Option Spot Price 3020.95 Strike Price 3000 Option Price 192.7 Buy or Sell 1

Call Option Spot Price 3020.95 Strike Price 3000 Option Price 202.65 Buy or Sell 1 37 | P a g e

Profit

181.7

Profit

192.7

Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1

Spot Price Strike Price

4337.1 3000

Same Strike Price Put Option Spot Price 4337.1 Strike Price 3000 Option Price 192.7 Buy or Sell 1 Profit 192.7

Call Option Spot Price 4337.1 Strike Price 3000 Option Price 202.65 Buy or Sell 1 Profit -1134.45 Net Profit -941.75

General conclusion Case 4 In either cases of extreme volatility (increase or decrease) investor can get positive returns.

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Case 5
View: Index will not lie in the range 2100 to 3600 Time T0=: 31-03-2009 S&P CNX NIFTY Index = 3020.95 Applicable option strategy: Long Straddle, Long Strangle, Short call butterfly, Short call condor (Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1) Long Straddle Time T0=31-03-2009: S&P CNX NIFTY Index = 3020.95 Available options: Call Option bought X= 2500, Option price= 565 Put Option Bought X= 2500, Option price=52.4 Strategy involves buying a call as well as a put on the same index at the same strike price. Based on mentioned view range above options have been selected. Spot Price Strike Price 3020.95 2000

Same Strike Price Put Option Spot Price 3020.95 Strike Price 2500 Option Price 52.4 Buy or Sell 0 Profit -52.4

Call Option Spot Price 3020.95 Strike Price 2500 Option Price 565 Buy or Sell 0 Profit -44.05

Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1 Spot Price Strike Price 4337.1 2000

Same Strike Price Put Option Spot Price 4337.1 Strike Price 2500 Option Price 52.4 Buy or Sell 0

Call Option Spot Price 4337.1 Strike Price 2500 Option Price 565 Buy or Sell 0 39 | P a g e

Profit Net Profit

1272.1 1219.7

Profit

-52.4

Long Strangle

Time T0=31-03-2009: S&P CNX NIFTY Index = 3020.95 Available options: Call Option X= 3200, Option price=109.80 Put Option X= 2200, Option price=25.90 Strategy involves 1 OTM put and 1 OTM call. Based on mentioned view range above options have been selected. Spot Price 3020.95 Put Option Spot Price 3020.95 Strike Price 2200 Option Price 25.9 Buy or Sell 0 Profit -25.9

Call Option Spot Price 3020.95 Strike Price 3200 Option Price 109.8 Buy or Sell 0 Profit -109.8

Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1 Spot Price 4337.1 Put Option Spot Price 4337.1 Strike Price 2200 Option Price 25.9 Buy or Sell 0 Profit -25.9

Call Option Spot Price 4337.1 Strike Price 3200 Option Price 109.8 Buy or Sell 0 Profit 1027.3 Net Profit 1001.4

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Short Call Butterfly

Time T0=31-03-2009: S&P CNX NIFTY Index = 3020.95 Available options: Two Call Options bought X= 3000, Option price=202.65 Sold Call Option X= 2300, Option price=564.85 Sold Call Option X=3700, Option price=51.10 This is constructed by selling one lower striking ITM call, buying two ATM calls and selling another OTM call. Based on mentioned view range above options have been selected. Spot price 3020.95

Call Option Spot Price 3020.95 Strike Price 3000 Option Price 202.65 Buy or Sell 0 Profit -181.7

Strike Price Option Price 2 call options bought

3000 202.65

Call Option Spot Price 3020.95 Strike Price 3000 Option Price 202.65 Buy or Sell 0 Profit -181.7

Call Option Spot Price 3020.95 Strike Price 2300 Option Price 564.85 Buy or Sell 1 Profit -156.1

Call Option Spot Price 3020.95 Strike Price 3700 Option Price 51.1 Buy or Sell 1 Profit 51.1

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Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1 Spot price 4337.1

Call Option Spot Price Strike Price Option Price Buy or Sell Profit 4337.1 3000 202.65 0 1134.45

Strike Price 3000 Option Price 202.65 2 call options sell

Call Option Spot Price 4337.1 Strike Price 3000 Option Price 202.65 Buy or Sell 0 Profit 1134.45

Call Option Spot Price 4337.1 Strike Price 2300 Option Price 564.85 Buy or Sell 1 Profit -1472.25 Net Profit 210.65

Call Option Spot Price 4337.1 Strike Price 3700 Option Price 51.1 Buy or Sell 1 Profit -586

Short Call Condor Time T0=31-03-2009:

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S&P CNX NIFTY Index = 3020.95 Available options: Sold Call Option X= 2300, Option price=564.85 Bought Call Option X= 2900, Option price=289.95 Bought Call Option X= 3100, Option price=154.20 Sold Call Option X=3600, Option price=25 This strategy requires selling 1 ITM call, buying 1 ITM call, buying 1 OTM call and selling 1 OTM call. Based on mentioned view range above options have been selected. Spot price 3020.95 Call Option Spot Price 3020.95 Strike Price 2900 Option Price 289.95 Buy or Sell 0 Profit -169

Call Option Spot Price 3020.95 Strike Price 2300 Option Price 564.85 Buy or Sell 1 Profit -156.1

Call Option Spot Price 3020.95 Strike Price 3100 Option Price 154.2 Buy or Sell 0 Profit -154.2

Call Option Spot Price 3020.95 Strike Price 3600 Option Price 25 Buy or Sell 1 Profit 25

Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1 Spot price 4337.1 Call Option Spot Price 4337.1 Strike Price 2900 Option Price 289.95 Buy or Sell 0 Profit 1147.15

Call Option Spot Price 4337.1 Strike Price 2300 Option Price 564.85 Buy or Sell 1 Profit -1472.25 43 | P a g e

Call Option Spot Price 4337.1 Strike Price 3100 Option Price 154.2 Buy or Sell 0 Profit 1082.9 Net profit 45.7

Call Option Spot Price 4337.1 Strike Price 3600 Option Price 25 Buy or Sell 1 Profit -712.1

Wrong View - Case 5 View: Index will lie in the range 2100 to 3600 Time T0=: 31-03-2009 S&P CNX NIFTY Index = 3020.95 Applicable option strategy: Short Straddle, Short Strangle, Long call butterfly, Long call condor Implemented option strategy: Short Strangle (Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1)

Short Strangle S&P CNX NIFTY Index = 3020.95 Available options: Call Option X= 3200, Option price=109.80 Put Option X= 2200, Option price=25.90 Spot Price 3020.95 Put Option Spot Price 3020.95 Strike Price 2200 Option Price 25.9 Buy or Sell 1 Profit 25.9

Call Option Spot Price 3020.95 Strike Price 3200 Option Price 109.8 Buy or Sell 1 Profit 109.8

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Time T1=28-05-2009: S&P CNX NIFTY Index = 4337.1 Spot Price 4377.1 Put Option Spot Price 4377.1 Strike Price 2200 Option Price 25.9 Buy or Sell 1 Profit 25.9

Call Option Spot Price 4377.1 Strike Price 3200 Option Price 109.8 Buy or Sell 1 Profit -1067.3 Net Profit -1041.4

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Case 6
View: Index will lie in the range 4500 to 5000 Time T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85 Applicable option strategy: Short Straddle, Short Strangle, Long call butterfly, Long call condor (Time T1=: 25-02-2010 S&P CNX NIFTY Index =4859.75)

Short Strangle Time T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85 Available options: Call Option X=5000, Option price=28.10 Put Option X= 4500, Option price=15.50 This strategy involves simultaneous selling of out of money put and call on the same underlying asset. Based on mentioned view range above options have been selected. Spot Price 4826.85 Put Option Spot Price 4826.85 Strike Price 4000 Option Price 15.5 Buy or Sell 1 Profit 15.5

Call Option Spot Price 4826.85 Strike Price 5000 Option Price 28.1 Buy or Sell 1 Profit 28.1

Time T1=: 25-02-2010 S&P CNX NIFTY Index =4859.75 Spot Price 4859.75 Put Option Spot Price 4859.75 Strike Price 4000 Option Price 15.5 Buy or Sell 1 Profit 15.5

Call Option Spot Price 4859.75 Strike Price 5000 Option Price 28.1 Buy or Sell 1 Profit 28.1 Net Profit 43.6

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Short Straddle Time T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85 Available options: Call Option X= 4800, Option price= 104.60 Put Option X= 4800, Option price=79.25 Call and put on the same underlying asset needs to be sold. Based on mentioned view range above options have been selected. Spot Price Strike Price 4826.85 4800

Same Strike Price Put Option Spot Price 4826.85 Strike Price 4800 Option Price 79.25 Buy or Sell 1 Profit 79.25

Call Option Spot Price 4826.85 Strike Price 4800 Option Price 104.6 Buy or Sell 1 Profit 77.75

Time T1=: 25-02-2010 S&P CNX NIFTY Index =4859.75 Spot Price Strike Price 4859.75 4800

Same Strike Price Put Option Spot Price 4859.75 Strike Price 4800 Option Price 79.25 Buy or Sell 1 Profit 79.25

Call Option Spot Price 4859.75 Strike Price 4800 Option Price 104.6 Buy or Sell 1 Profit 44.85 Net Profit 124.1

Long Call Butterfly Time T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85 Available options: Call Option X= 4800, Option price= 104.60 Call Option X= 4600, Option price= 251.55 Call Option X= 5000, Option price= 28.10 47 | P a g e

The strategy involves selling 2 ATM calls, buying one ITM call & buying 1 OTM call option. Based on mentioned view range above options have been selected. Spot price 4826.85

Call Option Spot Price 4826.85 Strike Price 4800 Option Price 104.6 Buy or Sell 1 Profit 77.75

Strike Price 4800 Option Price 104.6 2 call options sell

Call Option Spot Price 4826.85 Strike Price 4800 Option Price 104.6 Buy or Sell 1 Profit 77.75

Call Option Spot Price 4826.85 Strike Price 4600 Option Price 251.55 Buy or Sell 0 Profit -24.7

Call Option Spot Price 4826.85 Strike Price 5000 Option Price 28.1 Buy or Sell 0 Profit -28.1

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Time T1=: 25-02-2010 S&P CNX NIFTY Index =4859.75 Spot price 4859.75

Call Option Spot Price 4859.75 Strike Price 4800 Option Price 104.6 Buy or Sell 1 Profit 44.85

Strike Price 4800 Option Price 104.6 2 call options sell

Call Option Spot Price 4859.75 Strike Price 4800 Option Price 104.6 Buy or Sell 1 Profit 44.85

Call Option Spot Price 4859.75 Strike Price 4600 Option Price 251.55 Buy or Sell 0 Profit 8.2 Net Profit 69.8

Call Option Spot Price 4859.75 Strike Price 5000 Option Price 28.1 Buy or Sell 0 Profit -28.1

Long Call Condor Time T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85 Available options: Call Option X= 4400, Option price= 440.35 Call Option X= 4500, Option price= 339.50 Call Option X= 5000, Option price= 28.10 Call Option X= 5100, Option price= 12.65 49 | P a g e

This strategy involves buying 1 ITM call(lower strike), selling 1 ITM call(lower middle), selling 1 OTM call (higher middle) and buying 1 OTM call (higher call). Based on mentioned view range above options have been selected. Spot price 4826.85 Call Option Spot Price 4826.85 Strike Price 4500 Option Price 339.5 Buy or Sell 1 Profit 12.65

Call Option Spot Price 4826.85 Strike Price 4400 Option Price 440.35 Buy or Sell 0 Profit -13.5

Call Option Spot Price 4826.85 Strike Price 5000 Option Price 28.1 Buy or Sell 1 Profit 28.1

Call Option Spot Price 4826.85 Strike Price 5100 Option Price 12.65 Buy or Sell 0 Profit -12.65

Time T1=: 25-02-2010 S&P CNX NIFTY Index =4859.75 Spot price 4859.75 Call Option Spot Price 4859.75 Strike Price 4500 Option Price 339.5 Buy or Sell 1 Profit -20.25

Call Option Spot Price 4859.75 Strike Price 4400 Option Price 440.35 Buy or Sell 0 Profit 19.4

Call Option Spot Price 4859.75 Strike Price 5000 Option Price 28.1 Buy or Sell 1 Profit 28.1

Call Option Spot Price 4859.75 Strike Price 5100 Option Price 12.65 Buy or Sell 0 Profit -12.65

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Net Profit

14.6

Wrong View - Case 6 View: Index will not lie in the range 4500 to 5000 Time T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85 Applicable option strategy: Long Straddle, Long Strangle, Short call butterfly, Short call condor Implemented option strategy: Long Strangle (Time T1=: 25-02-2010 S&P CNX NIFTY Index =4859.75)

Long Strangle Time T0=: 11-02-2010 S&P CNX NIFTY Index = 4826.85 Available options: Call Option X=5000, Option price=28.10 Put Option X= 4500, Option price=15.50

Spot Price

4826.85 Put Option Spot Price 4826.85 Strike Price 4500 Option Price 15.5 Buy or Sell 0 Profit -15.5

Call Option Spot Price 4826.85 Strike Price 5000 Option Price 28.1 Buy or Sell 0 Profit -28.1

Time T1=: 25-02-2010 S&P CNX NIFTY Index =4859.75 Spot Price 4859.75 Put Option Spot Price 4859.75 Strike Price 4500 Option Price 15.5 Buy or Sell 0

Call Option Spot Price 4859.75 Strike Price 5000 Option Price 28.1 Buy or Sell 0

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Profit Net Profit

-28.1 -43.6

Profit

-15.5

Conclusion
On observing net profit at T1 for each of the correct views & corresponding strategies we see positive values. So we conclude that testing the strategies on the actual option prices showed that, under different scenarios profit is obtained on applying strategies as applicable for the view. Also when wrong views were taken losses were observed. So we conclude that when the strategies were applied for the opposite/wrong view and applicable strategies on the opposite views were adopted it led to loss. This shows that if our view is right there will always be profits on applying the correct/appropriate strategy. But if the view is wrong the strategy leads to losses. It is not the derivatives, per say, which leads to losses but the wrong views which leads to a losses. It is interesting to note that combination involving stocks and/or options can give very interesting payoffs which would be very useful if we have a very specific view of the future.

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