Finance

A STUDY ON DERIVATIVES SHORT STRADDLE OPTIONS STRATEGY ON
NIFTY 50 COMPANIES
At
TESRO INVESTMENTS PRIVATE LIMITED, HYDERABAD
A Project report submitted to GITAM Institute of Management.
In partial fulfillment for the award of the degree
MASTER OF BUSINESS ADMINISTRATION
Submitted By
Satya Sai baggam
(Reg.no: 122023601028)
Under the Guidance of
Mr. M. Kamakshaiah
Assistant Professor
GITAM INSTITUTE OF MANAGEMENT

GITAM (Deemed to be University)
VISAKHAPATNAM–530045
2020-2022
DECLARATION
I hereby declare that the study entitled “A STUDY ON DERIVATIVES SHORT STRADDLE
OPTIONS STRATEGY ON NIFTY 50 COMPANIES (2018-2019)” submitted by me to GITAM
INSTITUTE OF MANAGEMENT, GITAM (Deemed to be University), VISAKHAPATNAM, in partial
fulfillment of the requirement for the award of MASTER OF BUSINESS ADMINISTRATION. The
study conducted by TESRO INVESTMENTS PRIVATE LIMITED, HYDERABAD. The matter
embodied in this project report hasn’t submitted to any other University or institution for the award of
the degree.
SATYA SAI BAGGAM

DATE:
(SIGNATURE)
CERTIFICATE
This is to certify that the project report titled “A STUDY ON DERIVATIVES SHORT
STRADDLE OPTIONS STRATEGY ON NIFTY 50 COMPANIES (2018-19)” is an
original work carried out by SATYA SAI BAGGAM (Reg.no: 122023601028), with proper
guidance and supervision, in partial fulfillment for the award of the degree of Masters of
Business Administration by GITAM Institute of Management, GITAM (Deemed to be
University), Visakhapatnam during the Academic year 2020-22.
(SIGNATURE)
KAMAKSHAIAH M
Associate Professor
ACKNOWLEDGMENT
I express my gratitude to Y. GOUTHAMA RAO, DIRECTOR, GITAM INSTITUTE

OF MANAGEMENT, GITAM (Deemed to be University) for providing me this
opportunity.
I would also like to express my gratitude and sincere thanks to MR. GIRISH
RALLABANDI (MY PROJECTAND COMPANY GUIDE), for providing
their valuable feedback, and supporting relentlessly throughout the project. I sincerely
express my respect to M. KAMAKSHAIAH (MY FACULTY GUIDE) for giving his
valuable guidance, healthy support and suggestions to make the project a successful one.
I would like to thank GITAM INSTITUTE OF MANAGEMENT and TESRO

INVESTMENTS PRIVATE LIMITED, profusely for providing me an opportunity to gain
hands-on experience by working in a suitable corporate environment.
I also place my sense of gratitude to parents, friends, one and all who, directly or
indirectly, have lent their helping hand in this project.
Part I – Internship Project Report
Contents Page no.

1. Introduction 1
1.1. Need of the Study 2
1.2. Objectives of the Study 2
2
1.3. Scope of the Study 3
1.4. Research Design 3
1.5. Data Collection Method 4
1.6. Limitations of the Study
2. Industry and Company Profile 5

Industry Profile
2.1. Brokerage Training 5
2.1.1 Broker Definition 5
5
2.1.2 Brokerage Company 6
2.1.3 Types of Brokerage Firms
Company Profile 7
2.1.4 Introduction to the Company
3. Theoretical Framework 8
3.1. Topic Related Concepts
3.1.1 Financial Service Industry 8
3.1.2 Investment Industry 9
3.2. Indian Capital Market
3.2.1 Definition 10
3.2.2 Capital Market Participants 10
3.2.3 Capital Market Instruments 10
3.2.4 Role of Capital Market 11
3.2.5 Types of Capital Market 11
3.2.6 Functions of SEBI 12
3.2.7 Exchanges in India 12
3.3 Introduction to Derivatives
3.3.1 Definition 15
3.3.2 Evolution of Derivatives 15
3.3.3 Characteristics of Derivatives 16
3.3.4 Participants/Players in Derivatives market 17
3.4 Types of Financial Derivatives
3.4.1 Futures 20
3.4.2 Options 22
3.4.2.1 Features of Option Contract 22
3.4.2.2 Types of Options 23
3.5 Option Strategies
3.5.1 Short Straddle Strategy 32
3.6 Factors Influencing Option Price 34
3.7 Option Greeks 35
3.8
4. Analysis of the Study
4.1. Introduction 36
4.2. Analysis 36
Findings 69
Suggestions 70
Conclusion 71
Bibliography 72
1. Introduction
Derivatives are one of the very crucial financial instruments not just for investors but
also for the broader economics. Along with helping investors in hedging risks and
diversifying the portfolio, it also assists in hedging inflation and deflation and global
diversification. Basically, a derivative is a contract between two or more parties which
derives its value from an underlying asset or index.
Financial markets are characterized by a high level of volatility by their very nature.
The willingness of risk averse economic agents to protect themselves against the
uncertainties coming from asset price swings led to the development of the derivatives
market, which includes forward, futures, and options. Eventually, traders started using
derivatives as a source of direct investment instead of restricting it just for hedging and
it is an open fact that investing in any market without proper study is very risky and
may cost huge losses. It is very important to have a strategy and proper understanding
before investing.
In this project, I have chosen a strategy and studied the profitability of the strategy
during Vega (volatility) decay using the historical data for different companies. This
project is mainly focused on options, which are one of the types of the derivatives. It
consists of Call option and Put option. Call option is ‘Right to Buy’, so the person who
buy Call option buy the ‘Right to Buy’ but not the obligation from the seller who sell
the Call option but here seller is obliged to sell. Similarly, put option is ‘Right to Sell’,
so the buyer of Put option buy the ‘Right to Sell’ but not the obligation from the seller
of the Put option but here seller is obliged to buy.
Usually there will be a change in the volatility of the market immediately after an event
like financial results. The strategy on which I have worked is ‘Short Straddle’. I have
analyzed the impact of Vega (Volatility) decay on short straddle and profitability of the
strategy if we enter a day before the market and exit a day after the event on 10
companies for the years 2018-2019 during which we have 8 events as each year results
will be announced 4 times quarterly.
1
1.1 – Need of the Study
• To measure the performance of short straddle Strategy.
• To test the profitability of short straddle strategy using Vega (volatility) decay.
• The need here is to make the investor aware of the functioning of the strategies.
• To understand the pros and cons of the strategy before investing.
• To help the investor in taking investment decision.
• To identify the opportunities to invest in the market using this strategy.
1.2 – Objectives of the Study

The main objective of the research:
• To test the profitability of the short straddle options strategy with Vega decay on
Nifty 50 companies.
• To help investor to take decision regarding investment in short straddle strategy
when there is a change in volatility during key announcements like quarterly
results of a company.
• To give the investor proper analysis of the strategy so that further investment
decisions can be made easily.
1.3 – Scope of the Study
The Study is limited to “Options Trading” with special reference to Short Straddle
and situations when there might be change in volatility like key announcements or
quarterly results. Short straddle strategy is basically a neutral strategy where, the
trader expects the market to stay stable for some time without any greater
fluctuations in the price.
Generally, there would be a fall in the volatility in the market immediately after the
date of key announcements and so premium also comes down with the volatility. As
an option seller (both Call and Put), we can take the advantage of the reduction in
the premium due to volatility. This study is a humble attempt to at evaluating the
strategy with the change in the volatility only in the Indian market by taking 10
companies from NIFTY 50 companies.
2
1.4 – Research Design
Step1: Collecting the dates of quarterly results of 10 companies
under study from NSE Event Calendar for the years 2018-2019.
We will get 8 dates for each company (4 quarterly results per
year).
Step2: Collecting the historical data of the 10 companies under study
from investing.com for the years 2019-2019.
Step3: Selecting the ‘At the money’ strike price based on the market
price on the date before the event.
Step4: Finding out the premiums for Call and Put options on the dates
before and after the event from NSE options historical data website
based on the strike price.
Step5: Calculating the Net Credit by getting the difference between the
market price before and after the event date.
Step6: Calculating the Net Profit or Loss by multiplying Net credit with
the lost size and then calculating the Total profit or Loss by summing up
the Net profit or loss.
Step7: Formulating the results
Step8: Communicating the results
1.5 – Data Collection Method
The data is collected from Secondary sources. As the study is mainly based on the
technical analysis of the companies from the historical data available in the various
trading portals, no primary data is collected for this project.
Secondary Data:
The secondary data for the study was collected from various sources. Statistical
data for the study was collected from the web portals and reports of SEBI, NSE
and BSE. For extensive research survey, various published sources like printed
books, online journals, research thesis, dissertations and various online websites
were used.
1.6 – Limitations of the Study
The study is Limited to Short straddle strategy, although other option

strategies like bearish strategies, bullish strategies and other neutral
strategies are gaining popularity these days.
No qualitative factors are considered. The Study mainly focuses on
performance and Vega decay of the options and does not focus on other
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factors that may influence the market price other than volatility.
The study mainly focusses on the change in the volatility due to the
event but it does not consider other factors due to which volatility
may change.
The Study was mainly based on secondary data there is no primary
data collected.
The study is limited to Exchange Options. Although other derivative
instruments like currency derivatives, Interest rate Derivatives and Swaps
are gaining popularity these days.
4
2. Industry and Company Profile
Industry profile
2.1 – Brokerage Trading
2.1.1 – Broker definition
In financial terms, a broker is a regulated professional who buys and sells financial
instruments on the behalf of a client by charging a fee for that. Clients can be individual
investors or companies. The financial instruments that are bought or sold can come in
many forms like shares, derivatives, bonds, stocks and so on. A broker might work
independently; however, they are most often associated with a brokerage firm. Brokers
work in a variety of industries, including real estate, commodities, and even the art and
antique markets.
2.1.2 – Brokerage Company

The fundamental function of a brokerage firm is to act as a middleman between buyers and sellers
in order to expedite a transaction. Brokerage firms are normally compensated by commissions or
fees charged after a transaction has been completed successfully. These are now paid by either
the exchange or the customer, or in some situations both.
Brokerage firms exist to assist their clients in matching the opposite side of a deal, bringing buyers
and sellers together at the best feasible price for each, and charging a fee for their services.
5
2.1.3 Types of Brokerage Firms
Several distinct types of brokerage businesses offer a wide range of products and services
in the financial markets. Starting with the most expensive choice, below is a brief summary
of the three major varieties. Below, we'll go through each one in further depth.
1. Full-service brokerage: A full-service brokerage firm employs a professional

financial adviser who oversees all investment decisions and offers ongoing guidance
and support. With their high-touch services, such brokerages are the most expensive
alternative.
2. Discount brokerages: Discount brokers used to have physical locations, but they
are now mostly online platforms that allow do-it-yourself (or self-directed) investors
to make their own trading decisions while paying cheaper commissions.These
brokerage companies may tout relatively low flat fees for trades in television,
internet, and radio advertising.
3. Robo-advisors: Automated investment advice platforms, sometimes known as
robo-advisors, are a relatively new type of digital financial advisor that provides
investment management services with minimum human participation at a cheap
cost.
6
Company Profile
2.1.4 -- Introduction to the Company
TESRO INVESTMENTS PRIVATE LIMITED is a Private company incorporated on

Friday, 11 January 2019. It is classified as Non-government Company and is registered at
Registrar of Companies, Hyderabad. Has authorized share capital of Rs.100, 000 and has paid
up capital of Rs.100, 000. It is involved in financial intermediation, except insurance and
pension funding Directors of the Company are GIRISH CHANDRA RALLABANDI and
KRISHNA SASTRY KAKARAPARTI.
Company Name Tesro Investments Private Limited
Date of Incorporation 11.01.2019
State Telangana
Category Company limited by Shares
Sub Category Non-Govt.
Regd. Office Address TESRO INVESTMENTS PRIVATE

LIMITED PLOT NO 64 ROAD NO 5
AYYAPPA SOCIETY ROOM NO
204 ELITE SERVICE
APARTMENTS 500084 MADHAPUR
HYDERABAD-
Rangareddi
Email Id girish.rallabandi@gmail.com
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3. Theoretical Framework
3.1 – Topic Related Concepts
3.1.1 – Financial Service Industry:

The financial services industry is one of the most influential and important sectors of the economy. It
manages money both for individual and corporations. It comprises all those organizations that
manages money like commercial and investment banks, non-banking financial companies, insurance
companies, credit-card companies, hedge funds, brokerage firms, consumer finance firms and
accounting agencies. It is like a bridge between people who have money (savers and lenders) to invest
and people who need money (spenders and borrowers).
Without the financial services industry, money would have difficulty finding its way from savers to
individuals, companies, and governments that have businesses and projects to finance but insufficient
capital to do so themselves. At its best, the industry efficiently matches those who need money with
those who have savings to invest, minimizing the costs to each and allowing money to support the
most productive businesses and projects. The investment industry acts on behalf of savers, helping
them to navigate the financial markets. When the investment industry is efficient and trustworthy,
economies and individuals benefit.
Banks and insurance companies are the most important financial entities. Banks take depositors'
deposits and turn them into loans for borrowers. Insurance companies are among the major investors
as well as financial intermediaries that connect buyers of insurance contracts with capital providers
prepared to bear the insured risks.
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3.1.2 – Investment Industry
The investment industry is a subset of the financial services industry which includes all
participants that help savers invest their money and spenders raise capital in financial markets.
A well-functioning investment sector provides investors with a wide selection of investment

products and services that satisfy their needs, competitive markets that offer liquidity and keep
transaction costs low, timely and efficient information disclosure, and the capacity to change
risk exposures. The investing sector, like the rest of the financial services industry, relies on
trust to function.
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3.2 – Indian Capital Market
3.2.1 Definition
“The capital market is a place where people buy and sell securities. Securities in this sense is
simply a bundle of rights sold to the public by companies, authorities or institutions on which
people then trade in the capital market.”
3.2.2 -- Capital market participants:
Savings from various areas of the economy provide supply in this market. The following are the
sources of this savings: Individuals.
1. Corporate.
2. Governments.
3. Foreign countries.
4. Banks.
5. Provident Funds.
6. Financial Institutions.
3.2.3 Capital Market Instruments:
Capital Market Products are financial instruments that are utilised to raise capital resources
in the capital market. The transformations that have occurred in the Indian capital market,
particularly in the recent past, have been extraordinary.
The financial services industry has come to introduce a number of instruments with a view
to facilitate borrowing and lending of money in the capital market by the participants.
The various capital market instruments used by corporate entities for raising resources are
as follows:
1. Preference shares
2. Equity shares
3. Non-voting equity shares
4. Cumulative convertible preference shares
5. Company fixed deposits
6. Warrants
7. Debentures
8. Bonds
9. Mutual fund
10. Derivatives
11. Commodities
12. Currency exchange
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3.2.4 -- Role of Capital Market
The role of the capital market in creating and maintaining economic growth is critical. It
serves as an important and efficient medium for channelling and mobilising funds to
businesses, as well as a reliable source of investment in the economy.
The capital market plays a major role in Indian financial system:
1. To finance long term investments by mobilizing long-term savings.

2. To encourage more people to possess productive assets.
3. To improve capital allocation efficiency through a competitive pricing
mechanism.
4. To give liquidity to investors through a method that allows them to view financial assets.
5. To make transaction and information costs less expensive.
6. To build a link between investors.
3.2.5 -- Types of capital market
The Capital Market comprises the primary capital market and secondary capital market.
Primary Capital Market: The primary capital market is a market where new or fresh issues
are traded. It deals with the long-term flow of funds from the surplus sector to the government
and business sector through primary issues, as well as secondary issues to banks and non-bank
financial intermediaries. Corporate primary issues lead to capital formation.
Secondary Capital Market: The secondary market, also known as the "aftermarket," is a
financial market where securities that have already been issued in their initial private or public
offering can be traded. Stock exchanges are examples of secondary markets. Alternatively, the
term "secondary market" can refer to any market for used items.
The secondary market is also known as the stock market. The stock market includes the trading of
securities that have already been sold and listed on the primary market. Members of the exchange can
carry out any transaction in the stock market while adhering to the SEBI's rules and regulations. –
SEBI
SEBI was established by an administrative fiat of the Ministry of Finance in 1989. Since then,
SEBI has been given more and more authority.
The main market has become the preserve of SEBI since the repeal of the capital issues control
legislation and the enactment of the SEBI statute in 1992. Further, the ministry of finance,
government of India, has transferred most of the powers under the securities contracts act 1956
to SEBI.
SEBI protects the interest of investors in securities and promote the development of
securities market.
3.2.6 – Functions of SEBI
1. Ensure that stock exchanges and other financial markets are regulated.
2. Register and regulate capital market intermediaries such as brokers, merchant bankers,
11
and portfolio managers.
3. Register and regulate mutual funds in operation.
4. Encourage self-regulatory groups and regulate them.
5. Prohibit unethical and fraudulent trading practises in the securities markets.
6. Encourage the education and training of investors and securities market intermediaries.
7. Prohibit insider trading securities.
8. Regulate large-scale stock acquisitions and corporate takeovers.
9. Perform any other obligations that the government may designate.
10. Review any information on intermediaries or market participants.
11. Review books of depository participants, issuers of beneficiary owners.
12. Inspect and investigate books of accounts and insider records.
13. Suspend the banker's registration if a quarry is present.
14. Suspend certificates and registration if and quarry is there.
3.2.7 -- Exchanges in India
The stock exchanges are the important player of the capital market. They serve as a trading
platform for securities, assisting and controlling the buying and selling of securities.
There are mainly four stock exchanges in India. They are:
1. Bombay Stock Exchange (BSE)

2. National Stock Exchange (NSE)
3. The Over-The-Counter Exchange of India (OTCEI)
4. Regional Stock Exchanges
1. Stock Exchange (BSE): The Bombay Stock Exchange (BSE) is an Indian stock
exchange based on Dalal Street in Mumbai. It is Asia's oldest stock market exchange,
having been founded in 1875. The BSE is the world's ninth largest stock exchange. Under
the Securities Contracts Regulation Act, it became the first stock exchange to be
recognized by the Indian Government.
2. The Over-the-Counter Exchange of India (OTCEI): ICICI, SBI, UTI, Capital Markets
Ltd., Canban Financial Services Ltd., LIC, and GIC collaborated to promote the OTCEI.
With effect from August 23, 1989, it was recognized as a stock exchange under the
Securities Contracts Act 1956. The OTCEI is based on the NASDAQ automated quotation
system of the National Association of Securities Dealers in the United States, with
changes to suit Indian conditions.
The OTCEI was the first ringless, electronic, national exchange with a screen-based
trading system that listed a completely new class of small businesses. It allowed
companies with as little as Rs 30 Lakhs in paid-up capital to be listed, and it was the
first exchange to use a screen-based trading system, which was considerably different
from the BSE's open outcry approach.
3. National Stock Exchange (NSE): The NSE was set up in 12th November 1992
to encourage stock exchange reform through system modernization and competition.
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The NSE establishes a nationwide trading facility for equities, debt instruments and
hybrid. It insures all investors all over the country equally access through an
appropriate communication network.
It provides investors with a fair, efficient, and transparent securities market via an
electronic trading system, as well as current international securities market norms.
4. Regional Stock Exchanges: The regional stock exchanges provided investors an access
to big brokers in Mumbai. They also served as a link between the local companies and
local investors. They promoted trading in local scripts. As a result, issuers competed to list
their securities on as many exchanges as possible in order to attract investors from all
across the country. Each regional stock exchange followed its own set of rules and
processes for securities listing and trading, transaction clearing and settlement, and risk
management.
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3.3 Introduction to Derivatives:
Derivatives have become extremely important in finance in the last 40 years. On numerous
markets around the world, futures and options are actively traded. Financial institutions,
fund managers, and corporate treasurers engage in a variety of forward contracts, swaps,
options, and other derivatives in the over-the-counter market.
The financial derivatives are financial instrument whose prices or values are derived from
the prices of other underlying financial instruments or financial assets. The underlying
instruments may be an equity share, stock, bond, debenture, Treasury bill, foreign currency
or even another derivative asset.
Originally, underlying corpus is first created which can consist of one security or a
combination of different securities. The value of the underlying asset is bound to change as
the value of the underlying assets keep changing continuously. Hence, financial derivatives
are financial instruments whose prices are derived from the prices of other financial
instruments.
3.3.1 – Definition:
- In the words of Robert L. McDonald, ―” A derivative is simply a financial instrument (or

even more simply an agreement between two people) which have a value determined by the
prices of an underlying Asset.”
- International Accounting Standards Board (IASB) defines derivative as a “financial

instrument whose value changes in response to a change in the price of an underlying, such
as an interest rate, commodity, security price, or index.”
3.3.2 – Evolution of Derivatives:
In ancient Greece, the existence of derivatives instruments and markets dates back to the
seventeenth and eighteenth centuries where forward contracts in commodities, particularly
rice, were traded in Japan. Instrument features that today are considered to be characteristic
of modern derivatives exchanges emerged during the second half of the nineteenth century
on Chicago’s commodities exchanges. There, for the first time in financial history:
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● Quantities and prices were standardized.
● Margin calls were regulated.
● the possibility of fulfilling contracts by means of offsetting trades, rather than delivering
the underlying was introduced.
It is therefore not surprising that the large majority of early derivatives trade involved
commodities rather than financial instruments.
Financial derivatives, as we know them today, really started in the 1970s with profits and
losses written off-balance sheet (OBS).
In the late 1980s, the Financial Accounting Standards Board (FASB), an agency of the
Securities and Exchange Commission (SEC), outlined 14 distinct classes that among
themselves constituted the then available derivative financial instruments. Since then,
however, the world of derivatives has undergone dramatic changes.
Easily the most outstanding positive development of the 1990s and beyond has been the
increased emphasis of bankers and investors place on risk management.
Additionally, the booming trade in derivatives has seen to it that these instruments are no
longer minor off-balance-sheet receivables and payables. They are integral parts of
mainstream balance sheet (BS) activities, not only of banks and other financial institutions
but also of a long list of other firms, including hedge funds, pension funds, and insurance
entities, as well as manufacturing and service companies.
3.3.3 - Characteristics of Derivatives:
A derivative instrument is a financial derivative or other contract which has the following
characteristics:
1. Derivatives, by themselves, have no independent value. Their value is derived out
of the underlying assets.
2. Derivatives pricing and trading are complicated, and a full understanding of the underlying
asset's price behavior and product structure is required before dealing in these products.
3. Leverage or gearing is a property of derivatives.
3.3.4 – Participants/players in Derivatives market: The following are the three broad
participants in a Derivative Markets;
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i. Hedgers:
Hedging is a strategy used by investors to safeguard a current or expected position in

the spot market. This indicates that you must create a sell position if you hold a purchase
position, and vice versa. Hedgers are the people that carry out the hedging.
The hedger achieves protection against changing prices by purchasing or selling futures
contracts of the same type and quantity. Basically, Hedgers are the least risk lover in
the derivatives market. In short, hedger is a trader who trades in order to protect against
price fluctuations in financial instruments.
ii. Speculators:
Speculators are basically traders who enter the futures and options contract, with a
view to make profit from the subsequent price movements. In fact, they operate at a
high level of risk in anticipation of profits. Speculation provides liquidity in the market.
iii. Arbitrageurs:
Some traders participate in the market for obtaining risk-free profits. They do so by
simultaneously buying and selling financial instruments like stocks futures in
different markets. This process is known as ‘arbitrage’. Thus, ‘arbitrageurs’ are the
person who does such kind of trading.
Arbitrageurs keep a close eye on a variety of marketplaces. They buy from one
market and sell in the other whenever there is a chance of arbitrage. They make a risk-
free profit this way. They keep the prices of derivatives and current underlying assets
closely consistent and perform a valuable economic function.
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3.4 – Types of Derivatives:
There are many ways in which the derivatives can be categorized based on the markets where
they trade; based on the underlying asset and based on the product feature etc. some ways of
classification are following:
Mainly Derivatives are classified on the basis of
i. Financial Derivatives
ii. Non-Financial Derivatives
1. Financial derivatives: Financial derivatives are those derivatives which are of

financial nature. They are as follows:
a) Forward
b) Futures
c) Options
d) Swaps
2. Non-financial derivatives: Non-financial derivatives are those derivatives which are

not of financial nature. They are as follows:
a) Commodities
b) Metals
c) others
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a. Forwards: A forward contract is a simple customized contract between two parties to buy
or sell an asset at a specific price at a specific period in the future. This contract will be
settled at the end of the agreement.
b. Futures: A futures Contract is a standardized agreement between two parties to buy or

sell an asset at a certain time in a certain price.
c. Options: Options are financial derivatives that provide buyers with the right but not the
obligation to buy or sell an underlying asset at a predetermined price and date. There are
two types of options, they are
Call Option gives you the right to buy an underling asset at a

predetermined price from the seller on a particular date.
Put Option gives you the right to sell an underling asset at a pre-set price on a
particular date to the seller.
d. Swaps: A swap is a two-party derivative contract that involves the exchange of pre-agreed
cash flows from two different financial instruments. In most cases, the cash flows are
calculated using a predefined nominal value.
3.4.1 – Futures:
A legally binding agreement to buy or sell the underlying security at a future date is referred to as a
futures contract. Future contracts are contracts that are organized/standardized in terms of amount,
delivery time, and location, and can be settled at any time in the future.
he contract expires on a pre-determined date known as the contract's expiry date. Futures
can be settled by delivery of the underlying asset or cash at expiration. Cash settlement
allows liabilities resulting from a future contract to be settled in cash.
To properly understand a futures contract, we must know the specific terms of the contract.
Futures contracts must, in general, have at least the following five contract terms:
1. The identity of the underlying commodity or financial instrument

2. The futures contract size,
3. The futures maturity date, also called the expiration date, and
4. The delivery or settlement procedure,
5. The futures price.
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On stock futures, there are two basic positions: long and short. When the contract expires,
the long position agrees to buy the stock. When the contract expires, the short position
agrees to sell the shares.
Long Future Short Future
Payoff Payoff
Loss Profit
Profit Loss
Payoff = Profit/loss
K= Break Even Point P=
Price at Maturity
Short Future:
- The short futures position is an unlimited profit, unlimited risk position that can
be entered by the futures speculator to profit from a fall in the price of the
underlying.
- The trader sells first and buy later to gain from drop in the price of the underlying
asset.
- Loss Occurs When Market Price of Futures > Selling Price of Futures
Long Future:
- The long futures position is an unlimited profit, unlimited risk position that can be entered
by the futures speculator to profit from a rise in the price of the underlying.
- The trader buy initially and sell later with a profit anticipating the prices of the underlying
asset to rise.
- Loss occurs when Market Price of Futures< Buying Price of Futures
3.4.2 – Options:
Options Contract is a type of Derivatives Contract which gives the buyer/holder of the
contract the right (but not the obligation) to buy/sell the underlying asset at a
predetermined price within or at end of a specified period. The buyer / holder of the
option purchases the right from the seller/writer for a consideration which is called the
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premium. The seller/writer of an option is obligated to settle the option as per the terms
of the contract when the buyer/holder exercises his right. The underlying asset could
include securities, an index of prices of securities etc.
3.4.2.1 – Features of Option Contract:

1) Premium or down payment: The holder of this type of contract must pay a certain
amount called the ‘premium’ for having the right to exercise an options trade. In case
the holder does not exercise it, he/she loses the premium amount.
2) Strike price: This refers to the rate at which the owner of the option can buy or sell
the underlying security if he/she decides to exercise the contract. The strike price is
fixed and does not change during the entire period of the validity of the contract. It is
important to remember that the strike price is different from the market price.
3) Contract size: The contract size is the deliverable quantity of an underlying asset in
an options contract. These quantities are fixed for an asset.
4) Expiration date: Every contract comes with a defined expiry date. This remains
unchanged until the validity of the contract. If the option is not exercised within this
date, it expires.
5) Intrinsic value: An intrinsic value is the strike price minus the current price of the
underlying security.
6) Settlement of an option: There is no buying, selling or exchange of securities when
an options contract is written. The contract is settled when the holder exercises his/her
right to trade. In case the holder does not exercise his/her right till maturity, the
contract will lapse on its own, and no settlement will be required.
7) No obligation to buy or sell: In case of option contracts, the investor has the option
to buy or sell the underlying asset by the expiration date. But he is under no obligation
to purchase or sell. If an option holder does not buy or sell, the option lapses.
20
8) Other features
Option interest (OI): The total number of options contracts outstanding in the market
at any given point of time.
Option Class: All listed options of a particular type (i.e., call or put) on a particular underlying
instrument
Option Series: An option series consists of all the options of a given class with
the same expiration date and strike price
3.4.2.2-- Types of Options
Options are classified into various types on the basis of market movement:
a) Call Option: It is the right to buy. Buyer will buy the right to buy from a seller. In this
buyer expects the market to go up so that he can buy at a lower price and sell it at higher
price by giving premium and similarly, seller expects the market not to rise or go down
or at least remain the same so that he can take the premium as profit by giving margin
amount as security. In this buyer has limited loss (premium) and unlimited profit and
seller has limited profit (premium) and unlimited loss.
Call options may be combined for use in spread or combination strategies.

For example, a single call option contract may give a holder the right to buy 100 shares of
a company stock at Rs 1000 until the expiry date in three months. There are many
expiration dates and strike prices for traders to choose from. As the value of the company
stock goes up, the price of the option contract goes up, and vice versa.
The call option buyer may hold the contract until the expiration date, at which point they
can take delivery of the 100 shares of stock or sell the options contract at any point before
the expiration date at the market price of the contract at that time all options have a limited
lifespan. If the underlying stock price does not move above the strike price before the
option expiration date, the call option will expire worthless.
i. Long Call: The long call option strategy is the most basic option trading strategy
whereby the options traders buy call options with the belief that the price of the
underlying security will rise significantly beyond the strike price before the option
expiration date.
Long Call Payoff Diagram
Profit/Loss
Payoff= profit/loss
S= Strike
K= PricePoint
breakeven
K= Strike
S= Break Price
Even Point
P= Price at maturity
21
Payoff
Profit
Loss of Premium amount
there is no limit to the maximum profit possible when implementing the long call
option strategy
Maximum Profit = Unlimited
Profit Achieved When Price of Underlying >= Strike Price of Long Call
+ Premium Paid
Profit = Price of Underlying - Strike Price of Long Call - Premium Paid Risk for the
long call options strategy is limited to the price paid for the call option no matter how
low the stock price is trading on expiration date.
Max Loss = Premium Paid + Commissions Paid
Max Loss Occurs When Price of Underlying <= Strike Price of Long Call
Breakeven Point = Strike Price of Long Call + Premium Paid
ii. Short Call:

A Short Call means selling of a call option, where seller is obliged to buy the underlying
asset at a fixed price in the future. This strategy has limited profit potential if the stock
trades below the strike price sold and it is exposed to higher risk if the stock goes up
above the strike price sold.
22
A short call is a bearish trading strategy, reflecting a bet that the security underlying
the option will fall in price. A short call involves more risk but requires less upfront
money than a long put, another bearish trading strategy.
Short Call Payoff Diagram
Payoff Payoff= profit/loss

Payoff= profit/Loss
Profit of Premium amount S= Strike
K= breakeven PointPrice
S= StrikeK= breakeven Point

Price
S P P=maturity
P= Price at Price at maturity
Loss
there is no limit to the maximum Loss possible when implementing the short call
option strategy
Maximum Profit = limited
Profit Achieved When Price of Underlying <= Strike Price of short Call + Premium
Paid
Profit = Price of Underlying - Strike Price of Short Call - Premium Paid Risk for the
short call options strategy is unlimited to the price paid for the call option no matter
how high the stock price is trading on expiration date.
Max Profit = Premium received
Max Profit Occurs When Price of Underlying <= Strike Price of Short Call
Breakeven Point = Strike Price of Short Call + Premium Paid
b) Put Option:
It is the right to sell. Buyer will buy the right to sell from a seller. In this buyer
expects the market to go down so that he can sell at a higher price and buy it at
lower price later (this is called shorting- sell first, buy later) by giving premium
and similarly, seller expects the market not to go down or go up or at least remain
the same so that he can take premium as profit by giving margin amount as
security. In this buyer has limited loss(premium) and unlimited profit and seller
has limited profit(premium) and unlimited loss.
Put options are traded on various underlying assets, including stocks, currencies,
bonds, commodities, futures, and indexes.
A put option becomes more valuable as the price of the underlying stock decreases.
Conversely, a put option loses its value as the underlying stock increases. When they are
exercised, put options provide a short position in the underlying asset. Because of this, they
are used for hedging purposes or to speculate on downside price action.
i. Long Put: A long put refers to buying a put option, typically in anticipation of a
23
decline in the underlying asset. A trader could buy a put for speculative reasons,
betting that the underlying asset will fall which increases the value of the long
put option.
A long put could also be used to hedge a long position in the underlying asset. If
the underlying asset falls, the put option increases in value helping to offset the
loss in the underlying.
Long Put Payoff diagram
Payoff Payoff= profit/loss

Payoff= profit/loss
Profit K= breakeven
S= strikePoint
price
S= Strike Price
K= Breakeven Point
K P P= Price at maturity
P= price at maturity
P
Loss of Premium amount
Risk for implementing the long-put strategy is limited to the price paid for the
put option no matter how high the stock price is trading on expiration date.
Max Loss = Premium Paid + Commissions Paid
Max Loss Occurs When Price of Underlying >= Strike Price of Long Put
Breakeven Point = Strike Price of Long Put - Premium Paid
ii. Short Put: A short put refers to when a trader opens an options trade by selling
or writing a put option. The trader who buys the put option is long, and the trader
who wrote that option is short. The writer
24
(short) of the put option receives the premium (option cost), and the profit on
the trade is limited to that premium.
A short put is also known as an uncovered put or a naked put. If an investor
writes a put option, that investor is obligated to purchase shares of the
underlying stock if the put option buyer exercises the option.
Short Put Payoff Diagram
Payoff Profit of Premium amount Payoff= profit/loss
K= breakeven Point
S= Strike Price
P= Price at maturity
Loss
Risk for implementing the short put strategy is unlimited to the price paid for
the put option no matter how low the stock price is trading on expiration date.
Max Profit = Premium Received
Max Profit Occurs When Price of Underlying <= Strike Price of Short Put
Breakeven Point = Strike Price of Short Put - Premium Paid
3.5 -- Option Strategies:
If a person aspires to trade options, they need to do it the right way and follow the
right approach. Else they can be rest assured the gambling attitude will eventually
consume their entire trading capital and they will end up having a short, self-
destructive option trading career.
All we need to know is handful of strategies but we need to know them really
well. Once we know these strategies all we need to do is
25
analyze the current state of markets (or the stock) and map it with the right option
strategy from your strategy quiver.
Keeping this in perspective we will discuss certain strategies.
Types of
Strategies
Bullish Bearish Neutral

Strategi Strategi Strategi
es es es
--Bull Call --Bear Call --Long and

Spread Spread Short
Straddle
--Bull Put --Bear Put
Spread Spread --Long and
Short
1. Bull Call Spread: Amongst all the spread strategies, the bull call spread is one the most
popular one. The strategy comes handy when you have a moderately bullish view on the
stock/index.
The bull call spread is a two-leg spread strategy traditionally involving ATM and OTM
options. However, you can create the bull call spread using other strikes as well.
To implement the bull call spread –
Buy 1 ATM call option (leg 1) Sell

1 OTM call option (leg 2)
26
Bull Call Spread Max loss = Net Debit of the Strategy
Net Debit = Premium Paid for lower strike – Premium Received for higher strike
Bull Call Spread Max Profit = Spread – Net Debit
2. Bull Put Spread: The bull put spread is a two-leg spread strategy traditionally
involving ITM and OTM Put options. However, you can create the spread using other
strikes as well.
To implement the bull put spread –
Buy 1 OTM Put option (leg 1) Sell

1 ITM Put option (leg 2)
Bull PUT Spread Max loss = Spread – Net Credit
Net Credit = Premium Received for higher strike – Premium Paid for lower strike
Bull Put Spread Max Profit = Net Credit
3. Bear Call Spread: The Bear Call Spread is a two-leg spread strategy traditionally
involving ITM and OTM Call options. However, you can create the spread using other
strikes as well.
To implement the bear call spread – Buy 1
OTM Call option (leg 1) Sell 1 ITM
Call option (leg 2)
27
Net Credit = Premium Received – Premium Paid
Breakeven = Lower strike + Net Credit
Max profit = Net Credit
Max Loss = Spread – Net Credit
4. Bear Put Spread: The Bear Put Spread is quite easy to implement. One would
implement a bear put spread when the market outlook is moderately bearish.
By invoking a bear put spread one would make a modest gain if the markets correct (go
down) as expected but on the other hand if the markets were to go up, the trader will end
up with a limited loss.
To implement Bear Put Spread Strategy Buying an

in the money Put option Selling an Out of the
Money Put option Key Takeaways
Net Debit = Premium Paid – Premium Received
Breakeven = Higher strike – Net Debit
Max profit = Spread – Net Debit Max
Loss = Net Debit
5. Long and Short Strangle: A strangle is an improvisation over the
straddle. The improvisation mainly helps in terms of reduction of the strategy
cost, however as a trade-off the points required to breakeven increases.
To set up a long strangle one needs to buy OTM Call and Put option
28
The maximum loss in a long strangle is restricted to the extent of the premium
received
The profit potential is virtually unlimited in the long strangle
The short strangle is the exact opposite of the long strangle. You are required to sell
the OTM call and put option in a short strangle.
6. Long Straddle: Long straddle is perhaps the simplest market neutral strategy to
implement. Once implemented, the P&L is not affected by the direction in which the
market moves. The market can move in any direction, but it has to move. As long as the
market moves (irrespective of its direction), a positive P&L is generated.
To implement a long straddle all one has to do is –
Buy a Call option Buy a

Put option
Max loss = Net
premium paid
Upper Breakeven =
ATM + Net premium
Lower Breakeven =
7. Short Straddle:
ATM – Net premium
Short straddle requires you to simultaneously Sell the ATM Call and Put option. The
options should belong to the same underlying, same strike, and same expiry
29
The maximum profit is equal to the net premium paid, and it occurs at the strike at which
the long straddle has been initiated
The upper breakdown is ‘strike + net premium’. The lower breakdown is ‘strike – net
premium’
8. Covered Call:
A covered call is a popular options strategy used to generate income in the form of
options premiums.
To execute a covered call, an investor holding a long position in an asset then writes
(sells) call options on that same asset.
It is often employed by those who intend to hold the underlying stock for a long time
but does not expect an appreciable price increase in the near term.
This strategy is ideal for an investor who believes the underlying price will not
move much over the near-term.
9. Protective Put:
A protective put is a risk-management strategy using options contracts that investors
employ to guard against a loss in a stock or other asset.
For the cost of the premium, protective puts act as an insurance policy by providing
downside protection from an asset's price declines.
Protective puts offer unlimited potential for gains since the put buyer also owns shares
of the underlying asset.
3.5.1 – Short Straddle Strategy and How it Works
A short – or sold – straddle is the strategy of choice when the forecast is for neutral, or
range-bound, price action. Straddles are often sold between
30
earnings reports and other publicized announcements that have the potential to cause sharp
stock price fluctuations.
A short straddle consists of one short call and one short put. Both options have the same
underlying stock, the same strike price and the same expiration date. A short straddle is
established for a net credit (or net receipt) and profits if the underlying stock trades in a
narrow range between the break-even points. Profit potential is limited to the total
premiums received less commissions. Potential loss is unlimited if the stock price rises
and substantial if the stock price falls.
Simple example
Here is any example, consider Nifty is at 15764(as on June 29th 2021), so this would make
the 15750 strike ATM. The option premiums are as follows –
15750 CE is trading at 77.95
15750 PE is trading at 62.90
So, the short straddle will require us to sell both these options and collect the net premium
of 77.95+62.90= 140.85
Now let’s take a scenario where the market price will decrease from 15764 to
15750
This is the most favorable outcome for a short straddle. At 15750, the situation is quite
straight forward as both the call and put option would expire worthless and hence the
premium received from both the call and put option will be retained. The gain here would
be equivalent to the net premium received i.e., Rs.140.85.
So, this means, in a short straddle you make maximum money when the
markets don’t move!
31
3.6 Factors Influencing Option Price
Several factors affect the Option prices. These factors decide how the Options are priced.
One should be very clear about them. one must consider them before they decide to go
for Option Trading.
1. Option Volatility and Pricing

Volatility measures the possible price fluctuations in a security. Rise in Volatility leads
to rise in Option Premiums.
Volatility is also correlated with Fear Factor. We should notice that before big news
announcement which may have a direct impact on that security causes surge in
Volatility.
2. Underlying Security Price

Change in market price of an underlying security has direct effect on Option Price. That is
the main theme for playing with Options for speculative traders.
When the market price of underlying security increases, the Call Options Premiums
increase while the Put Options Premiums decrease.
3. Option Strike Price

Different Strike Prices for an Option show different response to change in market price
of underlying security. Price change in Options prices is more for the Strikes which are
near to current price of the underlying security.
4. Duration Left in Contract Expiry or Time Value

This is also an important factor you cannot ignore. Each Option Contract has a fixed
expiry date.
With each passing day, the Option Premium keeps on decreasing, irrespective of
the price changes in underlying security. This is called as Time Decay.
5. Dividend and Interest Rate

They don’t hold much significance for trading purposes. They indicate the interest rate
incurred on the cost of carrying the entire trade value and the Dividend yield on it.
32
3.7-- Option Greeks
These are more mathematical factors, known as Option Greeks, which have effect on the
Option Premium.
1. Delta – Delta measures how much the Option price is going to change with change
in price of the underlying security. It is the ratio of Change in Option Premium to
Change in underlying security.
2. Theta – Theta measure the change in Option Premium due to Time Decay. Value of
Theta gives value by which the Option Premium falls with each passing day. Theta
is a ratio of Change in Option Premium to Change in Time Duration left.
3. Gamma – Gamma talks about the rate at which the Delta is going to change with
change in market price of underlying security. Gamma is ratio of change in value of
Gamma to change in market price of underlying. Investors hedging the portfolios try
to keep Gamma at small values.
4. Vega – Vega is for volatility. It measures the change in Option Price due to change
in Volatility. Vega is the ratio of change in Option Price to change in Volatility.
5. Rho – Rho measure the change in Option Price due to change in interest rates.
33
4. Analysis of the Study
4.1 – Introduction
The Study is conducted on below Ten Nifty 50 companies for the period 2018-2019.
1. Reliance
2. Lupin
3. Maruti
4. Tata Steel
5. SBI
6. TCS
7. HDFC
8. ITC
9. Dr Reddy’s
10. Aurobindo
The options contract of any company expires every last Thursday of the month and if that Thursday is a
holiday, then the contract expires the previous day. The study concentrates on short straddle strategy
which is a neutral strategy for the period 2018-2019. We study the change in the premium along with the
volatility due to the events or announcements of the company. We considered the announcement of
quarterly results of the companies for the study. So, we will get 4 events per year and over all 8 events
for two years for each company.
Short Straddle Strategy:

In the Short straddle we “sell one At the Money (ATM) CALL option” and “sell one At the Money
(ATM) PUT option”. There is no fixed way of determining ATM strike price but generally we choose
any of the nearest prices to the market price either side. It is important to note that we can’t buy or sell
single unit of options but we need to go with lot. The size of the lot varies and it depends on the company
and it’s market price.
4.2 – Analysis
1. Reliance:
Step 1: Dates of the financial results announcements between the period 2018-2019 have been
collected.
EVENT DATE
Results 19-Jan-18
Financial
Results/Dividend 27-Apr-18
Financial Results 27-Jul-18
Financial Results 17-Oct-18
Financial Results 17-Jan-19
34
Financial
Results/Dividend 18-Apr-19
The above dates are collected from NSE event calendar website. These are the dates on which
financial results have been announced by Reliance.
Step 2: Market prices of Reliance between the period 2018-2019 have been collected from the
investing.com website (Historical Data). Market prices on the date before the events (event dates
are shown in the above table in step 1) have been noted as we are going to enter into the contract
based on this market price.
Below are the markets prices on the date before the event (at the Entry) and strike prices chosen
so that we can enter into the contract:
DATE
MARKET
BEFORE DATE AFTER
PRICE AT
EVENT STRIKE EVENT EVENT
ENTRY
YEAR S.NO DATE PRICE (ENTRY) (EXIT)
19-Jan- 18-Jan-18
911.06 920
1 18 22-Jan-18
27-Apr- 26-Apr-18
966.19 980
2 18 30-Apr-18
2018
26-Jul-18
27-Jul-18 1100.22 1120
3 30-Jul-18
17-Oct- 16-Oct-18
1152.87 1160
4 18 19-Oct-18
17-Jan- 16-Jan-19
1125.23 1120
5 19 18-Jan-19
18-Apr- 16-Apr-19
1331.13 1340
6 19 22-Apr-19
2019
18-Jul-19
19-Jul-19 1250 1260
7 22-Jul-19
18-Oct- 17-Oct-19
1383.39 1380
8 19 22-Oct-19
Step 3: Now collect the data of premiums for both Call and Put option for the above dates
of entry and exit so that we can understand the change in the premiums from date before
the event to date after the event. And after that calculate the total premium at the entry and
exit.
Total Premium = CE Premium + PE Premium
Below are the premiums of CALL (CE Premium) and PUT (PE Premium) options and the
total premiums at entry and exit for the dates before and after the events:
35
Step 4: Now calculate the net credit and net profit or loss using the lot size. According to
our assumption, premium will reduce immediately after the event due to fall in the
volatility. As a seller of both call and put option, we will gain profit if the premium falls
and loss if the premium rise.
Net credit = Total Premium at entry – Total Premium at exit
Net profit or loss = Net Credit * Net Profit or Loss
Total Profit or loss = sum of all the net profits or losses of all the events
Below is the table showing the net credit and net profit of Reliance which has a lot size
of 250.
36
Here, we got profits in 5 events and losses in 3 events out of 8 events and a net profit of Rs
7387.5.
2. Lupin:
collected.
EVENT DATE
06-Feb-
Results 18
Financial
Results/Dividend/Other 15-May-
business matters 18
Financial
Results/Dividend/Other 08-Aug-
business matters 18
Financial Results/Other 31-Oct-
business matters 18
Financial Results/Other 06-Feb-
business matters 19
Financial
Results/Dividend/Other 15-May-
business matters 19
Financial Results/Other 07-Aug-
business matters 19
Financial Results/Other 06-Nov-
business matters 19
financial results have been announced by Lupin in the period 2018-2019.
37
Step 2: Market prices of Lupin between the period 2018-2019 have been collected from the
investing.com website. Market prices on the date before the events (event dates are shown in the
above table in step 1) have been noted as we are going to enter into the contract based on this
market price.
MARKET DATE
PRICE BEFORE DATE AFTER
EVENT AT STRIKE EVENT EVENT
YEAR S.NO DATE ENTRY PRICE (ENTRY) (EXIT)
05-Feb-18
06-Feb-18 849.1 840
1 07-Feb-18
14-May-18
15-May-18 754.2 760
2 16-May-18
2018
07-Aug-18
08-Aug-18 866.6 860
3 09-Aug-18
30-Oct-18
31-Oct-18 876.65 880
4 01-Nov-18
05-Feb-19
06-Feb-19 837.7 840
5 07-Feb-19
14-May-19
15-May-19 810.4 810
6 16-May-19
2019
06-Aug-19
07-Aug-19 750.85 750
7 08-Aug-19
05-Nov-19
06-Nov-19 754.95 750
8 07-Nov-19
exit.
38
Below is the table showing the net credit and net profit of Lupin which has a lot size of
850.
Here, we got profits in all the 8 events and a net profit of Rs 60435.
39
3. Maruti:
collected.
EVENT DATE
25-Jan-
Results 18
27-Apr-
Financial Results/Dividend 18
26-Jul-
Financial Results 18
25-Oct-
25-Jan-
25-Apr-
Financial Results/Dividend 19
26-Jul-
24-Oct-
financial results have been announced by Maruti in the period 2018-2019.
Step 2: Market prices of Maruti between the period 2018-2019 have been collected from the
market price.
DATE AFTER
MARKET
EVENT STRIKE DATE EVENT
PRICE
YEAR S.NO DATE PRICE BEFORE (EXIT)
40
AT EVENT
ENTRY (ENTRY)
24-Jan-18
25-Jan-18 9434.95 9450
1 29-Jan-18
26-Apr-18
27-Apr-18 8946.45 8950
2 30-Apr-18
2018
25-Jul-18
26-Jul-18 9758.95 9800
3 27-Jul-18
24-Oct-18
25-Oct-18 6768.3 6800
4 26-Oct-18
24-Jan-19
25-Jan-19 7040.6 7000
5 28-Jan-19
24-Apr-19
25-Apr-19 7016.7 7000
6 26-Apr-19
2019
25-Jul-19
26-Jul-19 5756.75 5800
7 29-Jul-19
23-Oct-19
24-Oct-19 7440.25 7400
8 25-Oct-19
exit.
41
Below is the table showing the net credit and net profit of Maruti which has a lot size
of 250.
68050.
4. Tata Steel:
collected.
EVENT DATE
Results 09-Feb-18
Financial
Results/Dividend/Other
business matters 16-May-18
Financial Results/Other
business matters 13-Aug-18
business matters 13-Nov-18
42
business matters 08-Feb-19
Financial
business matters 25-Apr-19
business matters 07-Aug-19
Financial Results 06-Nov-19
financial results have been announced by Tata Steel in the period 2018-2019.
Step 2: Market prices of Tata Steel between the period 2018-2019 have been collected from the
market price.
MARKET DATE
08-Feb-18
09-Feb-18 671.45 680
1 12-Feb-18
15-May-18
16-May-18 625.95 620
2 17-May-18
2018
10-Aug-18
13-Aug-18 576.7 580
3 14-Aug-18
12-Nov-18
13-Nov-18 582.85 580
4 14-Nov-18
07-Feb-19
08-Feb-19 489.05 490
2019 5 11-Feb-19
6 25-Apr-19 525.25 530 24-Apr-19
43
26-Apr-19
06-Aug-19
07-Aug-19 401.6 400
7 08-Aug-19
05-Nov-19
06-Nov-19 403.95 400
8 07-Nov-19
exit.
Below is the table showing the net credit and net profit of Tata Steel which has a
lot size of 850.
44
Here, we got profits in 7 events and loss in 1 event out of 8 events and a net profit of Rs
26647.5.
5. SBI:
collected.
EVENT DATE
Results 09-Feb-18
Financial Results/Dividend 22-May-18
Financial Results 10-Aug-18
Financial Results 01-Feb-19
Financial Results 10-May-19
financial results have been announced by SBI in the period 2018-2019.
Step 2: Market prices of SBI between the period 2018-2019 have been collected from the
market price.
45
MARKET DATE
08-Feb-18
09-Feb-18 301.4 300
1 12-Feb-18
21-May-18
22-May-18 244.45 245
2 23-May-18
2018
09-Aug-18
10-Aug-18 317.4 320
3 13-Aug-18
02-Nov-18
05-Nov-18 285.35 285
4 06-Nov-18
31-Jan-19
01-Feb-19 293.65 295
5 04-Feb-19
09-May-19
10-May-19 299.3 300
6 13-May-19
2019
01-Aug-19
02-Aug-19 317.15 315
7 05-Aug-19
24-Oct-19
25-Oct-19 262.5 265
8 27-Oct-19
exit.
46
Below is the table showing the net credit and net profit of SBI which has a lot size of
1500.
47
37200.
6. TCS:
collected.
EVENT DATE
Results/Dividend 11-Jan-18
Financial Results/Dividend 19-Apr-18
Financial Results/Dividend 10-Jul-18
Financial Results/Dividend 11-Oct-18
Financial Results/Dividend 10-Jan-19
Financial Results/Dividend 09-Jul-19
Financial Results/Dividend 10-Oct-19
financial results have been announced by TCS in the period 2018-2019.
Step 2: Market prices of TCS between the period 2018-2019 have been collected from the
market price.
MARKET DATE
10-Jan-18
11-Jan-18 1375.87 2750
1 12-Jan-18
18-Apr-18
19-Apr-18 1548.67 3100
2 20-Apr-18
2018
09-Jul-18
10-Jul-18 1846.19 1850
3 11-Jul-18
10-Oct-18
11-Oct-18 2050.91 2050
4 12-Oct-18
09-Jan-19
10-Jan-19 1850.07 1850
x2019 5 11-Jan-19
6 12-Apr-19 1980.02 1980 11-Apr-19
48
15-Apr-19
08-Jul-19
09-Jul-19 2132.02 2140
7 10-Jul-19
09-Oct-19
10-Oct-19 1980.61 2000
8 11-Oct-19
exit.
Below is the table showing the net credit and net profit of SBI which has a lot size of 300.
49
Here, we got profits in 5 events and losses in 3 events out of 8 events and a net loss of Rs
33045.
7. HDFC:
collected.
EVENT DATE
Results/Others 29-Jan-18
business matters 30-Jul-18
business matters 29-Jan-19
Financial
business matters 13-May-19
Financial Results/Fund
Raising 02-Aug-19
financial results have been announced by HDFC in the period 2018-2019.
50
Step 2: Market prices of HDFC between the period 2018-2019 have been collected from the
market price.
MARKET DATE
25-Jan-18
29-Jan-18 1908.30 1920
1 30-Jan-18
27-Apr-18
30-Apr-18 1853.75 1860
2 08-May-18
2018
27-Jul-18
30-Jul-18 2047.25 2050
3 31-Jul-18
31-Oct-18
01-Nov-18 1769.25 1780
4 02-Nov-18
28-Jan-19
29-Jan-19 1946.9 1950
5 30-Jan-19
10-May-19
13-May-19 1931.7 1940
6 14-May-19
2019
01-Aug-19
02-Aug-19 2086.8 2080
7 05-Aug-19
01-Nov-19
04-Nov-19 2128.6 2140
8 05-Nov-19
exit.
51
Below is the table showing the net credit and net profit of HDFC which has a lot size of
550.
52
3410.
8. ITC:
collected.
EVENT DATE
Results 19-Jan-18
Financial Results 23-Jan-19
financial results have been announced by ITC in the period 2018-2019.
Step 2: Market prices of ITC between the period 2018-2019 have been collected from the
market price.
53
MARKET DATE
18-Jan-18
19-Jan-18 273.4 275
1 22-Jan-18
15-May-18
16-May-18 281.85 280
2 17-May-18
2018
25-Jul-18
26-Jul-18 286.15 285
3 27-Jul-18
25-Oct-18
26-Oct-18 287.55 285
4 29-Oct-18
22-Jan-19
23-Jan-19 289.75 290
5 24-Jan-19
10-May-19
13-May-19 297.75 300
6 14-May-19
2019
01-Aug-19
02-Aug-19 267.55 265
7 05-Aug-19
23-Oct-19
24-Oct-19 251.05 250
8 25-Oct-19
exit.
54
Total Profit or loss = sum of all the net profits of all the events.
Below is the table showing the net credit and net profit of ITC which has a lot size of
3200.
55
46240.
9. Dr Reddy’s :
collected.
EVENT DATE
Results 25-Jan-18
Financial Results 01-Feb-19
financial results have been announced by Dr Reddy’s in the period 2018-2019.
Step 2: Market prices of Dr Reddy’s between the period 2018-2019 have been collected from the
market price.
56
MARKET DATE
24-Jan-18
25-Jan-18 2559.40 2550
1 29-Jan-18
21-May-18
22-May-18 1853.75 1850
2 23-May-18
2018
25-Jul-18
26-Jul-18 2088.2 2100
3 27-Jul-18
25-Oct-18
26-Oct-18 2390.5 2400
4 29-Oct-18
31-Jan-19
01-Feb-19 2720.8 2700
5 04-Feb-19
16-May-19
17-May-19 2801 2800
6 20-May-19
2019
26-Jul-19
29-Jul-19 2704.95 2700
7 30-Jul-19
31-Oct-19
01-Nov-19 2783.2 2800
8 04-Nov-19
exit.
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Below is the table showing the net credit and net profit of Dr Reddy’s which has a lot size
of 125.
58
9175.
10. Aurobindo:
collected.
EVENT DATE
Results/Dividend 07-Feb-18
Financial Results/Dividend 12-Nov-18
Financial Results/Dividend 07-Feb-19
Financial Results/Dividend 12-Nov-19
financial results have been announced by Aurobindo in the period 2018-2019.
Step 2: Market prices of Aurobindo between the period 2018-2019 have been collected from the
market price.
59
MARKET DATE
06-Feb-18
07-Feb-18 596.85 600
1 08-Feb-18
25-May-18
28-May-18 594.15 600
2 29-May-18
++2018
08-Aug-18
09-Aug-18 610.85 610
3 10-Aug-18
09-Nov-18
12-Nov-18 815.3 820
4 13-Nov-18
06-Feb-19
07-Feb-19 759.85 760
5 08-Feb-19
27-May-19
28-May-19 681.7 680
6 29-May-19
2019
06-Aug-19
07-Aug-19 562 560
7 08-Aug-19
11-Nov-19
12-Nov-19 437.7 440
8 13-Nov-19
exit.
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Below is the table showing the net credit and net profit of Aurobindo which has a lot size
of 650.
61
26422.5.
Portfolio Management using this strategy:
Step 1: Create a consolidate sheet with a combined data of analysis of all the companies and sort
the data oldest to newest based on the event date.
Below is the screesnshot which has a part of the consolidated sheet.
Step 2: Now take a portfolio of Rs 750000. We are going to invest in the short straddle strategy
based on the above analysis date wise (as we have already sorted the data date wise in step 1).
We are already having net profit or loss for every event, so we are going to check our profitability
by the end of the two years (2018-2019). It is shown below.
62
So, from this we can say that “final return” we got after 2 years is Rs 976752.5
Step 3: Calculate the below parameters:
i. Profit:
Profit = Final return – initial investment
= 976752.5 – 750000
= 226752.5
Therefore, profit we earned by the end of the two years is Rs 226752.5
ii. Rate of Return (in %):
Rate of Return = (Profit / initial investment) * 100
= (226752.5 / 750000) * 100
= 30.23%
iii. Total number of winning trades are 54
63
iv. Total number of losing trades are 26
v. Average of winning trades is 8535.88
vi. Average of losing trades is -9007.16
vii. Maximum of winning trades is 40112.5
viii. Maximum of losing trades is -51000
ix. Compound Annual Growth Rate (CAGR) :
Here,
Final value = 976752.5
Intial value = 750000
Time in years = 2
CAGR in % = [(976752.5 / 750000)^(1/2) – 1] * 100
= 14.12 %
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FINDINGS
Volatility came down in most of the cases immediately after the event.
The objective was to find out whether the short straddle is gaining profits or incurring
losses for the ten companies when we use it during important events as we expect
the reduction in volatility in the years 2018-2019. The primary finding was that the
short straddle strategy is profitable most of the times with change in the volatility.
We got profits for 7 companies out of 10 companies and overall, we are in a profit of
Rs 226752.5 with 30.23% rate of return and 14.12% CAGR. With this we can infer
that short straddle strategy when used with Vega decay gave profits mostly.
The results/return for any strategy is completely dependent on the market movements.
The Short straddle strategy is profitable when there is very less market movement.
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SUGGESTIONS
There is no specific strategy which actually can guarantee higher percentage

returns. Every strategy is based on the market price. So, whenever we invest in
Options, we need to take a professional advice and do a proper market analysis
and choose an appropriate strategy to be in a profitable position.
Short straddle strategy for Vega decay can be used only on a diversified portfolio.
We can’t rely on this strategy just by investing in one company.
The Study mainly focuses on Vega decay and the performance of the option and
neglects the other factors like Time Value, intrinsic value, etc. So, before investing
we need to focus on all the factors which influence the option price.
One needs to go through all the strategies and choose the best strategy which is
beneficial for a particular market situation.
The study mainly focuses on the technical analysis and quantitative aspects and
neglects the qualitative factors which are also to be considered in order to have
a true picture of the research carried.
66
CONCLUSION
Derivative products serve the vitally important economic functions of price discovery
and risk management. Further they serve as a risk management tools by facilitating the
trading of risks among the market participants. These products enable market
participants to take the desired risks.
From this Project it is proved that the underlying asset’s value changes according to
the major economy announcements, depending on the underlying asset prices the
option value also changes. By doing the analysis we can know when to buy, when to
sell and how much risk we can take.
The project mainly focuses on the practical analysis on Short Straddle Strategy where
many tables and role of excel is very crucial. The result of this study was that the
strategy’s profitability is completely dependent on the market movements and Vega
decay and there is a chance of getting profits for a diversified portfolio.
67
BIBLIOGRAPHY
1. Books
a) Mr. Akhil Sebestian “A Study On Financial Derivatives” New Delhi, Isara
Solutions.
b) Roger G. Clarke, Harindra de Silva, CFA, Steven Thorley, CFA
“FUNDAMENTALS OF FUTURES AND OPTIONS”,
2. Important Links
a) https://www.nseindia.com/
b) https://www.investing.com/
c) https://zerodha.com/varsity/module/option-strategies/
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Part II – On the Job Training Report (OJT)
Week 1:
Introduction:
Company Name – Tesro Investments Private Limited
Services Offered – Involved in Financial Intermediation other than that conducted by monetary
institutions
This is the detailed report of our learnings in the first week of our internship which started on 04-05-
2021. In the first week, we were taught about macroeconomics concepts and its applications like
Monetary Policy and GDP.
Monetary Policy:
It is the demand side of the economic policy which refers to the actions undertaken by a nation’s central
bank (RBI in India) to control money supply and achieve macroeconomic goals that promote
sustainable growth (economic).
There are two basic types of Monetary Policy:
1. Contractionary Monetary Policy: It is used to decrease the amount of money circulating
throughout the economy. It can be achieved by selling government bonds, raising interest rates
and increasing the reserve requirements for banks. This method is used to avoid inflation.
2. Expansionary Monetary Policy: It is used to increase the money supply in the economy. It can
be achieved by decreasing interest rates, lowering reserve requirements for banks. This method
is used to lower the unemployment rates and to stimulate business activities and consumer
spending. In simple words, it is used to fuel economic growth.
Gross Domestic Product (GDP):

It is the total market or monetary value of all the finished goods and services produced within a
country’s borders in a specific time period.
GDP of India (approx.) = 2.5 Trillion $

Total Population = 140 crores = 1.4 * 10^9
Assuming 1$ = Rs 70
GDP per person per annum = (2.5 * 70 * 10^12) / (1.4 * 10^9)
= Rs 125000
GDP per person per month = 125000/12 = Rs 10,417
GDP of United States (approx.) = 20 Trillion $

Total Population = 30 crores = 0.3 * 10^9
Assuming 1$ = Rs 70
GDP per person per annum = (20 * 70 * 10^12) / (0.3 * 10^9)
= Rs 4666666.66
GDP per person per month = 4666666.66 / 12 = Rs 388888.88
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Service Sector – 60% (approx.)
GDP Manufacturing Sector – 25% (approx.)
Agriculture Sector – 15% (approx.)
Service Sector – 30 crores (approx.)
Population Manufacturing Sector – 20 crores (approx.)
Agriculture Sector – 90 crores (approx.)
Agriculture Sector:
GDP per person per annum = (15% of total GDP) / (0.9 * 10^9)
= (0.15 * 2.5 * 70 * 10^120) / (0.9 * 10^9)
= Rs 29166.66
GDP per person per month = 29166.66 / 12
= Rs 2430.55
Service Sector:
= (0.6 * 2.5 * 70 * 10^ 12) / (0.3 * 10^9)
= Rs 350000
GDP per person per month = 350000 / 12 = Rs 29166.66
Manufacturing Sector:
= (0.25 * 2.5 * 70 * 10^12) / (0.2 * 10^9)
= Rs 218750
GDP per person per month = 218750 / 12 = Rs 18229.16
Concepts under Monetary Policy:

Market Liquidity: Liquidity refers to the extent to which a market allows assets to be bought and sold
at stable and transparent prices. In simple terms, it is a measure of how many buyers and sellers are
present, and whether transactions can take place easily.
70
High levels of liquidity arise when there is a significant level of trading activity and when there is both
high supply and demand for an asset, as it is easier to find a buyer or seller. If there are only a few
market participants, trading infrequently, it is said to be an illiquid market or to have low liquidity.
Stable Inflation Rate:

Price stability refers to an inflation rate low and stable enough that it would not influence the decision-
making processes of economic agents i.e., households / individuals, firms, governments and central
banks.
A good and acceptable inflation rate is around 2%.
Stable Exchange Rate:

A stable exchange rate or fixed exchange rate is a regime applied by a government or central bank that
ties the country's official currency exchange rate to another country's currency or the price of gold. The
purpose of a fixed exchange rate system is to keep a currency's value within a narrow band.
Cash Reserve Ratio (CRR):

The percentage of cash required to be kept in reserves is called the Cash Reserve Ratio. The cash
reserve is either stored in the bank's vault or is sent to the RBI. Banks do not get any interest on the
money that is with the RBI under the CRR requirements.
Current CRR is 4%
Statutory Liquid Ratio (SLR):

Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to
maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that
banks are expected to keep before offering credit to customers.
Current SLR is 18%.
Bank Rate:
Rate at which a nation’s domestic banks borrows money from the Central bank without providing any
security is called Bank Rate. It is generally for long term.
Current Bank rate is 4.25%.
Repo Rate:
Rate at which RBI lends money to domestic banks by purchasing securities is called Repo Rate. It is
generally for short term. It is used to control inflation and deficiency of funds.
As of 27 March 2020, Repo rate is 4.40%.
Reverse Repo Rate:

Rate at which RBI borrows money from the domestic banks. It is used to manage cash flow. During
high levels of inflation in the economy, the RBI increases the reverse repo. It encourages the banks to
park more funds with the RBI to earn higher returns on excess funds.
Currently Reverse Repo Rate is 3.35%.
Marginal Standing Facility (MSF):

It is a window for banks to borrow money from the RBI in an emergency like when inter-bank liquidity
dries up completely.
Inter Bank Liquidity:

Inter bank markets allow liquidity to be readily transferred from banks with a surplus to banks with a
71
deficit.
Inter Bank Rate:

Rate of interest charged on short term loans made between banks is called Inter Bank Rate.
Banks may borrow money from other banks to ensure that they have enough liquidity for their
immediate needs or lend money when they have excess cash in hand. It is short term and it lasts hardly
more than 2 weeks.
In UK, this is handled by a committee called
LIBOR – London Interbank offered rate
In India, this is handled by a committee called
MIBOR – Mumbai Interbank offered rate
Open Market Operations (OMO):

Open Market Operations are purchase and sale of government securities (G-secs) by the RBI on the
Centre’s behalf to streamline money supply and interest rates.
In case of excess liquidity in the market, RBI issues these securities via auctions.
Money Multiplier Effect:

According to Money Multiplier Effect, an increase in the bank lending should translate to an expansion
of a country’s money supply. The size of the multiplier effect depends on the percentage of deposits
that banks are required to hold as reserves.
Net Demand and Time Liabilities (NDTL):

The Net Demand and Time Liabilities or NDTL shows the difference between the sum of demand and
time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of
assets held by the other bank.
Picture Reference - https://www.youtube.com/watch?v=hbWJ9M-me_M
72
Week 2:
Introduction:
Company Name – Tesro Investments Private Limited
Services Offered – Involved in Financial Intermediation other than that conducted by monetary
institutions
This is the detailed report of our learnings in the first week of our internship which started on 04-05-
2021. In the Second week, we have mostly learnt about macroeconomics concepts and its applications
like Fiscal Policy, Inflation and time value of money.
Fiscal Policy:
Fiscal Policy refers to the use of Government spending and income. It also includes tax policies to
influence economic conditions, especially macro economic conditions, including aggregate demand for
goods and services, employment, inflation, and economic growth.
Budget: It is as estimation of the government income and expenditure over a specified future period of
time and is usually compiled and re-evaluated on a periodic basis. There are two types of Budget:
1. Expansionary Budget: Expenditure of the government will be higher than revenue in this type
of budget. It is used to increase the money supply in the economy using budgetary instruments
to either raise spending or cut taxes—both having more money to invest for customers and
companies.
2. Contractionary Budget: Revenue of the government will be more than the expenditure in this
type of budget. It is a monetary measure referring either to a reduction in government spending,
particularly deficit spending or a reduction in the rate of monetary expansion by a central bank.
Government Income: It is the receipts of the Government. There are two types of receipts:
1. Capital Receipts: Capital receipts are loans taken by the government from the public,
borrowings from foreign countries and institutes, and borrowings from the RBI. Recovery of
loans given by the Centre to states and others is also included in capital receipts.
2. Revenue Receipts: Receipts from the taxes, interest and dividend on government investment
comes under revenue receipts.
Government Expenditure: It is the expenditure of the Government. There are two types of
government expenditure:
1. Capital expenditure: It is the part of the government spending that goes into the creation of
assets like schools, colleges, hospitals, roads, bridges, dams, railway lines, airports and seaports.
2. Revenue expenditure: It is the expenditure for the normal running of government departments
and various services, interest charges on debt incurred by government, subsidies and so on.
Broadly speaking, expenditure which does not result in the creation of assets is treated as
revenue expenditure.
Fiscal Deficit: A fiscal deficit is a shortfall in a government's income compared with its spending. The
government that has a fiscal deficit is spending beyond its means. A fiscal deficit is calculated as a
percentage of gross domestic product (GDP), or simply as total money spent in excess of income.
MPS – Marginal Propensity to save
MPC – Marginal Propensity to consume
Laffer Curve – It is the ideal rate of taxation
73
Inflation:
Inflation refers to the rise in the prices of most goods and services of daily or common use, such as
food, clothing, housing, recreation, transport, consumer staples, etc. Inflation measures the average
price change in a basket of commodities and services over time.
Future Value = Present Value * (1+r) ^n
Wealth generation for a lumpsum investment:
Different Investment options:
1. Fixed Deposit or Debt (Rate of Interest – 7%)
2. Real Estate (Rate of Interest – 13.5%)
3. Gold (Rate of Interest – 8.5%)
4. Stock Markets (Rate of Interest – 18%)
Let us say we have invested Rs 1000000 in all of the above investment options. Let us calculate the
return after 30 years
1. Debt or FD:
Time (n) = 30 years, Amount = Rs 1000000, r = 7%
FV = PV * (1+r) ^n
= 1000000 * (1+0.07) ^30
= Rs 76 Lakhs (approx.)
2. Gold:
Time (n) = 30 years, Amount = Rs 1000000, r = 8.5%
FV = PV * (1+r) ^n
= 1000000 * (1+0.085) ^30
= Rs 1.15 crores (approx.)
3. Real Estate:
Time (n) = 30 years, Amount = Rs 1000000, r = 13.5%
FV = PV * (1+r) ^n
= 1000000 * (1+0.135) ^30
4. Stock Markets:
Time (n) = 30 years, Amount = Rs 1000000, r = 18%
FV = PV * (1+r) ^n
= 1000000 * (1+0.18) ^30
Week 3:
In week 3, we were taught fundamental analysis of a company and its importance. We have discussed
about intrinsic value of a company and how to find it. There is a step-by-step procedure in fundamental
analysis to calculate intrinsic value of a company. With this we can valuate a company and come to a
conclusion whether that company is overvalued or undervalued before investing.
Step:
1. Understanding the business model of a company (Products, STP, business strategy, etc.) using
SWOT analysis, porter’s five force model and BCG matrix. Understand qualitative factors like
corporate governance.
2. Go through financial statements (Annual report, P&L, balance sheet, cash flow etc.).
3. Perform ratio analysis – Profitability ratios, liquidity ratios, leverage ratios, activity or turnover
ratios, valuation ratios.
4. Perform valuation using relative and absolute valuation methodology.
74
5. Decision to buy or sell or hold/wait and then perform DCF(Discounted cash flow) for intrinsic
value.
We learnt the main aspects of a company’s financial statements we need to look into for analyzing
fundamentally. Below are few of the important aspects:
• P/E Ratio
• ROE (Return on Equity)
• ROCE (Return on capital employed)
• Debt to Equity ratio
• Asset Capacity
• Debt
• Debt to Asset ratio
• P/EG (price per earnings to growth) ratio
• Current ratio
• Quick ratio
• Growth rates like CAGR, Gross profit ratio etc.
• Cash flow from operating activities
• EPS
• Reserves and surplus
We have also learnt about large cap, medium cap and small cap companies. We were given two
companies in a sector and asked to make a presentation on fundamental analysis of those companies for
which we did and discussed about them.
Week 4:
We were taught the basics of Derivatives and various types of derivatives. We have discussed about the
history and origin of derivative and its importance. Below are the four main types of derivatives:
• Forwards
• Futures
• Options
• Swaps
We have learnt about OTC contracts which doesn’t require an exchange. We were also taught that out
of the four derivatives, only two would be used in the stock market, they are futures and options.
In this week, we have learnt mostly about futures contract and how it works. A future contract is an
agreement to buy or sell a particular asset on a pre agreed price at a specific time in future. The contract
expires and gets squared off automatically on the expiry date and its an obligation of the parties to
execute the contract before or on the expiry date. However mostly parties won’t wait till the expiry
date.
Future price = spot price * e^(r*t)
There are three kinds of participants in the market:

1. Hedgers – They try to minimize the risk
2. Speculators – They try to maximize the profit
75
3. Arbitragers – They gain profits by exploiting inefficiencies in the market. They buy a
commodity in one market (which has low price) and sell it other market (which has high price).
Week 5:
We were taught Option derivatives, option Greeks and two of the option strategies in this week.
We have discussed about basics and various types of Options derivatives. Options is a contract which
allows an investor to buy or sell an underlying instrument like a stock or index at a pre-determined
price over a certain period of time.
There are two types of options:
1. Call Option: It is the right to buy. Buyer will buy the right to buy from a seller. In this buyer
expects the market to go up so that he can buy at a lower price and sell it at higher price by
giving premium and similarly, seller expects the market not to rise or go down or at least remain
the same so that he can take the premium as profit by giving margin amount as security.
In this buyer has limited loss (premium) and unlimited profit and seller has limited profit
(premium) and unlimited loss.
2. Put Option: It is the right to sell. Buyer will buy the right to sell from a seller. In this buyer
expects the market to go down so that he can sell at a higher price and buy it at lower price later
(this is called shorting- sell first, buy later) by giving premium and similarly, seller expects the
market not to go down or go up or at least remain the same so that he can take premium as
profit by giving margin amount as security.
In this buyer has limited loss(premium) and unlimited profit and seller has limited
profit(premium) and unlimited loss.
We have also discussed types of Call options with examples, there are three types of Call options:
1. In the Money (ITM): Strike price is less than the market price while buying.
2. At the Money (ATM): Strike price and market price are same while buying.
3. Out of the Money (OTM): Strike price is above the market price while buying.
We have also discussed types of Put options with examples, there are three types of Put options:
1. In the Money (ITM): Strike price is more than the market price while buying.
2. At the Money (ATM): Strike price and market price are same while buying.
3. Out of the Money (OTM): Strike price is above the market price while buying.
We have discussed about option Greeks. The various kinds of option Greeks as below have been
discussed:
1. Delta: It is the probability of a stock price getting into the money of the options. The change in
the option premium for 1% change in the stock price can be determined. We need to note that
probability and premium are directly proportional i.e., with increase in probability, premium
will increase and with decrease in probability, premium will decrease.
2. Gamma: It is the change in the delta with respect to change in the market price. It is not much
used practically.
3. Theta: Theta is basically about time of expiry. It decays as the time decays or near to the expiry
date.
4. Vega: Vega is basically about volatility. The change in premium due to the volatility has been
discussed under this. Basically, volatility and premium are directly proportional. Low stable
companies may have high volatility and so high premium.
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5. Roh: It is about Interest rates. The change in premium with the change in the interest rates has
been discussed under this. Usually, roh doesn’t change much and so it is not so important and
rarely used.
We have also discussed about two important option strategies in this week. They are:
1. Bull Call Spread: In this strategy we BUY 1 ATM CALL Option and SELL 1 OTM CALL
Option. This is a bullish strategy and net debit strategy. We have discussed about the maximum
loss, maximum profit, advantages and disadvantages of this strategy using a website
‘opstra.definedge.com’ with examples.
2. Bull Put Spread: In this strategy we SELL 1 ITM PUT Option and BUY 1 OTM PUT
Option. This is also a bullish strategy and net credit strategy. We have discussed about the
maximum loss, maximum profit, advantages and disadvantages of this strategy using a website
Week 6:
In this week, we were taught five more option strategies and debt or bond markets.
The strategies we have discussed in this week are:
1. Bear Put spread: In this strategy we BUY 1 ATM PUT Option and SELL 1 OTM PUT
Option. This is a bullish strategy and net debit strategy. We have discussed about the maximum
loss, maximum profit, advantages and disadvantages of this strategy using a website
‘Opstra.definedge.com’ with examples.
2. Bear Call Spread: In this strategy we SELL 1 ITM CALL Option and BUY 1 OTM CALL
Option. This is also a bullish strategy and net credit strategy. We have discussed about the
maximum loss, maximum profit, advantages and disadvantages of this strategy using a website
3. Straddle Strategy:
a. Long Straddle: In this we BUY 1 ATM CALL Option and BUY 1 ATM PUT
Option. It is a net debit strategy.
b. Short Straddle: In this we SELL 1 ATM CALL Option and SELL 1 ATM PUT
Option. It is a net credit strategy.
4. Covered Call: In this strategy, investor holding a long position in an asset sell call option on
that same asset. It is used to generate income in the forms of options premiums.
5. Cash Secured Put: This strategy involves selling a put option and simultaneously setting aside
the cash to buy the stock if assigned.
We have discussed about Debt or bond markets. There are three important aspects of debt market:
1. Coupon
2. Yield = Interest rate/price
3. Duration
There are three risks involved in the debt markets:

1. Interest Risk
2. Repayment Risk
3. Credit Risk
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We have also discussed about basics and types of mutual funds. Below are the main types of mutual
funds:
1. Debt Funds: In this, the fund manager invests the investors money in avenues like bonds and
other fixed-income securities.
There are 5 types of debt funds:
a. Overnight Fund
b. Ultrashort Fund (6 to 12 months)
c. Short term fund (1 to 2 years)
d. Medium Fund (2 to 10 years)
e. GILT Fund (more than 10 years
2. Equity Funds: Funds invested based on market capitalization are called equity funds.
There are 4 types of equity funds:
a. Large Cap
b. Multi Cap
c. Mid Cap
d. Small Cap
3. Sectoral Funds: These are sector-based funds
4. Thematic Funds: These are theme-based funds
5. Hybrid Funds: These are combination of debt and equity funds.
A mutual fund company is called AMC (Asset Management Company). Total assets managed by a
fund manager is called AUM (Assets under management) and the fund management fee is a percentage
of AUM.
There are two types of mutual funds based on the way they are sold. They are:
1. Direct Funds: These are funds sold directly by the AMC
2. Indirect Funds: These are funds sold by broker like banks etc.
78

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A STUDY ON DERIVATIVES SHORT STRADDLE OPTIONS STRATEGY ON

TESRO INVESTMENTS PRIVATE LIMITED, HYDERABAD

A Project report submitted to GITAM Institute of Management.

In partial fulfillment for the award of the degree

MASTER OF BUSINESS ADMINISTRATION

GITAM INSTITUTE OF MANAGEMENT

SATYA SAI BAGGAM

I express my gratitude to Y. GOUTHAMA RAO, DIRECTOR, GITAM INSTITUTE

I would like to thank GITAM INSTITUTE OF MANAGEMENT and TESRO

Contents Page no.

2. Industry and Company Profile 5

1.2 – Objectives of the Study

1.3 – Scope of the Study

1.5 – Data Collection Method

1.6 – Limitations of the Study

The study is Limited to Short straddle strategy, although other option

2.1 – Brokerage Trading

2.1.1 – Broker definition

2.1.2 – Brokerage Company

1. Full-service brokerage: A full-service brokerage firm employs a professional

2.1.4 -- Introduction to the Company

TESRO INVESTMENTS PRIVATE LIMITED is a Private company incorporated on

Company Name Tesro Investments Private Limited

Date of Incorporation 11.01.2019

Category Company limited by Shares

Sub Category Non-Govt.

Regd. Office Address TESRO INVESTMENTS PRIVATE

3.1.1 – Financial Service Industry:

A well-functioning investment sector provides investors with a wide selection of investment

3.2.2 -- Capital market participants:

3.2.3 Capital Market Instruments:

The capital market plays a major role in Indian financial system:

1. To finance long term investments by mobilizing long-term savings.

There are mainly four stock exchanges in India. They are:

1. Bombay Stock Exchange (BSE)

- In the words of Robert L. McDonald, ―” A derivative is simply a financial instrument (or

- International Accounting Standards Board (IASB) defines derivative as a “financial

3.3.2 – Evolution of Derivatives:

● Margin calls were regulated.

3.3.3 - Characteristics of Derivatives:

Hedging is a strategy used by investors to safeguard a current or expected position in

Mainly Derivatives are classified on the basis of

ii. Non-Financial Derivatives

1. Financial derivatives: Financial derivatives are those derivatives which are of

2. Non-financial derivatives: Non-financial derivatives are those derivatives which are

b. Futures: A futures Contract is a standardized agreement between two parties to buy or

Call Option gives you the right to buy an underling asset at a

1. The identity of the underlying commodity or financial instrument

Long Future Short Future

K= Break Even Point P=

3.4.2.1 – Features of Option Contract:

3.4.2.2-- Types of Options

Call options may be combined for use in spread or combination strategies.

Long Call Payoff Diagram

Loss of Premium amount

ii. Short Call:

Short Call Payoff Diagram

Payoff Payoff= profit/loss

S= StrikeK= breakeven Point

Long Put Payoff diagram