Final Report on

Strategy Analysis for

HDFC, BankNifty and Gold

By
Nayak Bhatia (I204)
Bhavya Chandra (N219)
Keshav Malpani (N257)
Kartik Saxena (N277)
Vasundhara Shrivastava (N284)
Dhrumil Talati (N288)

Faculty Mentor: Dr Kalyani

Mulchandani
Strategies:

Butterfly Spread:

The Butterfly Spread is an options trading strategy that involves the simultaneous purchase and
sale of multiple options contracts with the same expiration date but different strike prices. It is
named "butterfly" because if you were to graph the profit and loss potential of the strategy, it
would resemble the shape of a butterfly.
Here's how a Butterfly Spread works:
1. Components: A Butterfly Spread involves three strike prices:
• Two options are purchased, one with a lower strike price (in-the-money) and one
with a higher strike price (out-of-the-money).
• Two options are sold, both with a strike price in between the purchased options.
2. Position: Depending on whether calls or puts are used, there are two variations:
• Call Butterfly Spread: Buy one call option at the lowest strike price, sell two call
options at a middle strike price, and buy one call option at the highest strike price.
• Put Butterfly Spread: Buy one put option at the highest strike price, sell two put
options at a middle strike price, and buy one put option at the lowest strike price.
3. Profit and Loss: The Butterfly Spread profits when the underlying asset's price remains
close to the middle strike price at expiration. If the price is too high or too low, the
strategy may result in a loss.
4. Maximum Profit: The maximum profit is achieved if the underlying asset's price is
exactly at the middle strike price at expiration. The maximum profit is calculated as the
difference between the middle strike prices and the strike prices of the purchased and sold
options, minus the net premium paid to enter the trade.
5. Maximum Loss: The maximum loss occurs if the underlying asset's price is significantly
above or below the range of strike prices at expiration. The maximum loss is limited to
the initial net premium paid to enter the trade.
6. Breakeven: There are two breakeven points for a Butterfly Spread:
• For a Call Butterfly, the lower breakeven point is the lower strike price plus the
net premium paid, and the upper breakeven point is the higher strike price minus
the net premium paid.
• For a Put Butterfly, the lower breakeven point is the higher strike price minus the
net premium paid, and the upper breakeven point is the lower strike price plus the
net premium paid.
7. Risk-Reward Ratio: The risk-reward ratio for a Butterfly Spread is generally favorable,
as the potential loss is limited to the premium paid while the potential profit can be
several times the premium paid if the underlying asset's price remains close to the middle
strike price at expiration.
Butterfly Spreads are often used by options traders when they anticipate minimal price
movement in the underlying asset and seek to profit from low volatility. They are also commonly
used as a hedging strategy or as part of a larger options trading strategy.

Straddle Strategy
The Straddle Strategy is an options trading strategy that involves simultaneously purchasing
both a call option and a put option with the same strike price and expiration date on the same
underlying asset. This strategy is typically used when traders expect significant price movement
in either direction but are uncertain about the direction of the movement.
Here's how the Straddle Strategy works:
1. Components: A Straddle involves buying:
• One call option with a specific strike price and expiration date.
• One put option with the same strike price and expiration date.
2. Position: By buying both a call and a put option, the trader is positioned to profit from
significant price movement in either direction. The strategy is effectively a bet on
volatility rather than the direction of the underlying asset's price movement.
3. Profit and Loss: The Straddle Strategy profits if the underlying asset's price moves
significantly in either direction before the options expire. The potential profit is
theoretically unlimited if the price moves far enough in one direction to cover the
combined cost of both options. The maximum loss is limited to the total premium paid to
enter the trade.
4. Breakeven: There are two breakeven points for a Straddle:
• Upper Breakeven: The strike price of the call option plus the total premium paid.
• Lower Breakeven: The strike price of the put option minus the total premium
paid.
5. Volatility Impact: The Straddle Strategy benefits from increased volatility in the
underlying asset's price. Higher volatility increases the probability of the price moving
significantly in one direction or the other, increasing the potential for profit.
6. Time Decay: Time decay, or theta decay, can erode the value of both the call and put
options over time. Therefore, the Straddle Strategy is most profitable if the significant
price movement occurs relatively soon after initiating the trade.
7. Risk-Reward Ratio: The risk-reward ratio for a Straddle is asymmetrical. The maximum
loss is limited to the premium paid, while the potential profit is theoretically unlimited if
the price moves significantly in one direction.
8. Choosing Strikes and Expiration: Traders typically choose the strike price and
expiration date based on their expectations for price movement and the level of volatility
in the underlying asset. They may select strikes close to the current price for an at-the-
money straddle or strikes further out for an out-of-the-money straddle.
The Straddle Strategy is commonly used by options traders during periods of anticipated
volatility, such as around earnings announcements, economic data releases, or other events that
may significantly impact the price of the underlying asset.

The total AUM is INR 1000000

We have allocated 30% into Butterfly spread = INR 300000

We have allocated 30% into Straddle strategy = INR 300000
We have allocated 40% into Long Gold = INR 400000
 1. Long Butterfly using PUT.

We created the butterfly strategy for HDFC Bank.

Net Number of
Date Expiry Strike Price Quantity Close Premium Contracts
11-Mar-24 25-Apr-24 1420 200 33 -6600
11-Mar-24 25-Apr-24 1460 400 55 22000 -150 2000
11-Mar-24 25-Apr-24 1500 200 77.75 -15550

The net premium is given by (200*-33)+(400*55)+(200*-77.55) = -150

Which gives the number of contracts as 300000/150=2000 contracts

Reasons for choosing HDFC Bank:

a. HDFC Bank, India's largest private sector lender, will take 4-5 years to fully digest its
merger with its parent last July but expects to restore a key financial metric to pre-merger
levels at the end of that period
b. The lender's quarterly earnings last week prompted a sharp 15% decline in the stock,
even as its profit beat expectations, as analysts raised concerns about lending margins and
sluggish deposit growth in its second quarterly report since merging with Housing
Development Finance Co.
c. Other metrics, including the net interest margin, deposit and loan growth will be
contingent on the economic environment and the strategic decisions the bank makes to
adapt to the environment

Due to the following reasons, we chose butterfly spread as

a. It works perfectly in a Range Bound condition.
b. We have a neutral outlook on HDFC stock.
c. Butterfly spread have limited risk tolerance as compared to other strategies.
d. Since Butterfly Spreads involve buying and selling multiple options contracts, they may
have lower upfront costs compared to some other strategies.

The Profit Loss using the strategy for a period starting at 11-March-2024 till 02-April-2024 looks
as follows:
 1420 1460 1500
Net
Date Stock Price Put 1 Put 2 Put 3 Premium P/L
11-03-2024 1427.800049 33 55 77.75 -150 300000
12-03-2024 1459.550049 20 34.7 55.75 -1270 2540000
13-03-2024 1460.400024 20.7 35.75 56.85 -1210 2420000
14-03-2024 1455.449951 21.5 36.8 58.85 -1350 2700000
15-03-2024 1452.650024 23.4 39.85 60.5 -840 1680000
18-03-2024 1446.050049 22 39.2 62.2 -1160 2320000
19-03-2024 1449.349976 20.85 37.15 59.25 -1160 2320000
20-03-2024 1431.050049 26.6 45.95 70.45 -1030 2060000
21-03-2024 1445.75 19 35.4 57.65 -1170 2340000
22-03-2024 1442.849976 18.35 35.35 57.4 -1010 2020000
26-03-2024 1425.400024 24.25 43.7 69.95 -1360 2720000
27-03-2024 1440.699951 18.15 35.6 61.15 -1620 3240000
28-03-2024 1447.900024 15.8 30.45 54.3 -1840 3680000
01-04-2024 1470.5 8.4 18.2 36.75 -1750 3500000
02-04-2024 1480.150024 6.5 14.4 30.65 -1670 3340000

P/L
4000000
3500000
3000000
2500000
2000000
1500000
1000000
500000
0
16-03-2024

27-03-2024
11-03-2024
12-03-2024
13-03-2024
14-03-2024
15-03-2024

17-03-2024
18-03-2024
19-03-2024
20-03-2024
21-03-2024
22-03-2024
23-03-2024
24-03-2024
25-03-2024
26-03-2024

28-03-2024
29-03-2024
30-03-2024
31-03-2024
01-04-2024
02-04-2024

Short Straddle Strategy

Date Expiry Option Strike Price Close

BANKNIFTY 11-Mar-24 03-04-2024 CE 46500 1488
BANKNIFTY 11-Mar-24 03-04-2024 PE 46500 393.6

Reason for choosing Bank Nifty:

 a. Due to Elections moving in, the index is expected to outperform in the near months.
b. Due to march ending and income tax closures, the bank performs at a consolidated level.

Reasons for choosing

a. Expectation of Significant Price Movement: A Straddle is a strategy used when you

anticipate that the underlying asset will experience substantial price movement in
either direction, but you're uncertain about the direction. By simultaneously buying
both a call and put option with the same strike price and expiration date, you're
positioned to profit from volatility regardless of whether the price moves up or down.
b. Capitalizing on Volatility: Straddles benefit from increased volatility in the
underlying asset's price. If the price moves significantly in one direction or the other,
the value of either the call or put option will increase, potentially resulting in a profit.
Traders may use Straddles around events like earnings announcements, where
volatility tends to spike.
c. Potential for Unlimited Profit: In theory, the profit potential for a Straddle is
unlimited if the price of the underlying asset moves far enough in one direction to
cover the combined cost of both options. This asymmetrical risk-reward profile can
be attractive to traders seeking significant profit potential from a relatively small
investment.
d. Hedging Against Uncertainty: Straddles can serve as a hedging strategy against
uncertainty in the market or specific events that could impact the price of the
underlying asset. By establishing a Straddle position, you're essentially insuring
yourself against adverse price movements, as you stand to profit if the price moves
significantly in either direction.
e. Neutral Outlook: If you have a neutral outlook on the underlying asset's price but
expect volatility, a Straddle allows you to profit from volatility while remaining
agnostic to the direction of the price movement. This makes it suitable for situations
where you're unsure about the stock's future direction but anticipate increased
volatility.
f. Defined Risk: While the profit potential of a Straddle is theoretically unlimited, the
maximum loss is limited to the total premium paid to enter the trade. This defined risk
can provide traders with peace of mind, knowing that their potential losses are capped
regardless of how much the price moves against their position.

The net returns are given by:

Bank Nifty Net

Date Spot Premium Call Put Net Payoff
11-03-2024 47327.85156 1881.60 1488 393.6 299174.40
 12-03-2024 47282.39844 1836.10 1478.5 357.6 291939.90
13-03-2024 46981.30078 1742.30 1235.3 507 277025.70
14-03-2024 46789.94922 1586.50 1085.7 500.8 252253.50
15-03-2024 46594.10156 1453.10 888.9 564.2 231042.90
18-03-2024 46575.89844 1406.95 874.6 532.35 223705.05
19-03-2024 46384.80078 1284.80 665.8 619 204283.20
20-03-2024 46310.89844 1184.60 625.7 558.9 188351.40
21-03-2024 46684.89844 1146.65 790.85 355.8 182317.35
22-03-2024 46863.75 1105.90 835.7 270.2 175838.10
26-03-2024 46600.19922 942.40 666.45 275.95 149841.60
27-03-2024 46785.94922 829.70 641.2 188.5 131922.30
28-03-2024 47124.60156 900.00 810.1 89.9 143100.00
01-04-2024 47578.25 1152.70 1136.35 16.35 183279.30
02-04-2024 47545.44922 1082.25 1076.65 5.6 172077.75

We incurred a loss of INR 1,27,096 in this strategy

Net Payoff
350000.00
300000.00
250000.00
200000.00
150000.00
100000.00
50000.00
0.00
02-04-2024
11-03-2024
12-03-2024
13-03-2024
14-03-2024
15-03-2024
16-03-2024
17-03-2024
18-03-2024
19-03-2024
20-03-2024
21-03-2024
22-03-2024
23-03-2024
24-03-2024
25-03-2024
26-03-2024
27-03-2024
28-03-2024
29-03-2024
30-03-2024
31-03-2024
01-04-2024

To hedge the losses, we took a long call option in GOLD with expiry on 27 MAY and Strike
price of 67000.

The reasons for choosing gold are:

a. There is a fall in dollar index and with fall of dollar, the prises of gold rises. Gold is
denominated in US dollars on global markets. Therefore, when the US dollar strengthens
against other currencies, the price of gold tends to decrease in dollar terms. Conversely,
when the US dollar weakens, the price of gold tends to increase. This relationship is
because a stronger dollar makes gold more expensive for holders of other currencies,
leading to decreased demand and lower prices while a weaker dollar makes gold
relatively cheaper and increases demand, pushing prices higher.
 b. The inflation data is high as expected by the FED. So there are strong chances of interest
rate hike in the next FOMC meeting. Also in India, there are slight inflammatory
pressures and RBI might increase the interest rates. Gold typically has an inverse
relationship with interest rates. When interest rates are low, the opportunity cost of
holding gold (which doesn't yield interest or dividends) decreases, leading to increased
demand and higher prices. Conversely, higher interest rates can reduce the attractiveness
of gold as an investment, leading to lower prices. Now, with interest rates expected to go
down in the US and also in India, gold prices may continue to rise.
c. Gold demand in China has been on the rise in recent quarters. The Chinese central bank
has been adding substantial quantity of gold to its reserves which is leading to the
increase in the gold price in the US and also in India.

The returns provided by gold are shown as below;

STRIKE Spot P/L per

DATE PRICE Prices Contract Premium Net P/L
07-Mar-24 67,000.00 66845 0.00 -368 -368.00
08-Mar-24 67,000.00 67490 490.00 -368 122.00 732
11-Mar-24 67,000.00 67555 555.00 -368 187.00 1122
12-Mar-24 67,000.00 67610 610.00 -368 242.00 1452
13-Mar-24 67,000.00 67200 200.00 -368 -168.00 -1008
14-Mar-24 67,000.00 67240 240.00 -368 -128.00 -768
15-Mar-24 67,000.00 67285 285.00 -368 -83.00 -498
18-Mar-24 67,000.00 67520 520.00 -368 152.00 912
19-Mar-24 67,000.00 67495 495.00 -368 127.00 762
20-Mar-24 67,000.00 67570 570.00 -368 202.00 1212
21-Mar-24 67,000.00 68740 1,740.00 -368 1,372.00 8232
22-Mar-24 67,000.00 68185 1,185.00 -368 817.00 4902
25-Mar-24 67,000.00 68100 1,100.00 -368 732.00 4392
26-Mar-24 67,000.00 68475 1,475.00 -368 1,107.00 6642
27-Mar-24 67,000.00 68585 1,585.00 -368 1,217.00 7302
28-Mar-24 67,000.00 69140 2,140.00 -368 1,772.00 10632
01-Apr-24 67,000.00 70595 3,595.00 -368 3,227.00 19362
02-Apr-24 67,000.00 70835 3,835.00 -368 3,467.00 20802

The profits derived by gold are INR 20802

 P/L
25000

20000

15000

10000

5000

-5000