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It's a summer training project.
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04/08/2023
Presentation on the Role of the Option Strategies
in Hedging the Risk.
04/08/2023
Submitted to : prof. Mohit Dhawan
submitted by:Prabir Deb.
04/08/2023
Introduction: Derivative is a contract whose value is depends on or derived from the
value of underlying assets.
Options give the buyer (holder) a right but not an obligation to buy or sell an asset in future.
Two types of Options, Call Option and Put Option.
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Options payoffs. Long Asset.
Short Asset.
NIFETY
PROFIT
LOSS
6000 61005900
LONG NIFTY PAYOFF
PROFIT
LOSS
6000 61005900NIFETY
SHORT NIFTY PAYOFF
04/08/2023 INDEX OPEN - 5900
Options payoffs.
long call.
long put.
5700 5800 5900 6000 6100 6200 6300
LONG CALL PAYOFFPROFIT
LOSS
5700 5800 5900 6000 6100 6200 6300
LONG PUT PAYOFFPROFIT
LOSS
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Options payoffs. Short Call.
Short Put.
5700 5800 5900 6000 6100 6200 6300
SHORT CALL PAYOFFPROFIT
LOSS
5700 5800 5900 6000
6100 6200 6300
SHORT PUT PAYOFFPROFIT
LOSS
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NEED OF THE STUDY.What are the various types of strategies?
Which strategies are more risky?
How do we implement different strategies?
How do we get payoff in different strategies?
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To know about various derivative contracts.
To know option contracts broadly.
To understand how options are traded in NSE.
To understand different option strategies and its implications.
To understand how investors use different strategies to hedge their risk.
OBJECTIVE OF THE STUDY.
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Research Methodology.Research Design:
Data Collection Method:
Data Source:
Sample Size:
Exploratory Research.
Secondary Data.
Different websites and the Bible of Option strategies(book).
Four categories of strategies.
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Analysis.
Bullish strategies:
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Bull call spread:
•Maximum risk [net debit paid] •Maximum reward [difference in strikes - net debit]
Bull put spread:
•Maximum risk [difference in strikes _ net credit] •Maximum reward [net credit received]
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Covered call:
Maximum risk [stock price paid _ call premium] Maximum reward [call strike _ stock price paid] _ call premium
Collar:
•Maximum risk [stock price _ put premium] _ [put strike _ call premium]. •Maximum reward [call strike _ put strike _ the risk of the trade]
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Bearish Strategies.
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Bear put spread:
•Maximum risk [net debit paid] •Maximum reward [difference in strikes _ net debit]
Bear call strategy:
•Maximum risk [difference in strikes _ net credit] •Maximum reward [net credit received]
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Covered put:
•Maximum risk uncapped •Maximum reward [shorted stock price _ strike price] _ put premium
Reverse collar or fence:
•Maximum risk: capped. •Maximum reward: capped.
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Volatility Strategies.
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Long straddle:
•Maximum risk [net debit paid] •Maximum reward [uncapped]
Long strangle:
•Maximum risk [net debit paid] •Maximum reward [uncapped]
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Strap:
•Maximum risk [net debit paid] •Maximum reward [uncapped]
Strip:
•Maximum risk [net debit paid] •Maximum reward [uncapped]
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Range bound Strategies.
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Long butterfly:
•Maximum risk [difference in adjacent strikes _ net credit] •Maximum reward [net credit received]
Long iron condor:
•Maximum risk [difference in adjacent strikes _ net credit] •Maximum reward [net credit received]
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Short straddle:
•Maximum risk [uncapped] •Maximum reward [net credit received]
Short strangle:
•Maximum risk [uncapped] •Maximum reward [net credit received]
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Findings of the study. This study gives me an opportunity to be familiarized with derivatives.
This study enlighten me about basic terms of options .
I get to know that there are various types of strategies used in derivative market to minimize risk and to maximize the profit potentials.
An investor should use strategies according to the market trend, keeping the risk and return payoff in mind.
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Suggestions.Investors should buy and sell contracts regularly because it generates more cash inflows than holding any position for a long time.
Investors who are novice should use some basic strategies, like long call, short call, long put & short put. Although there are possibility of risk but that is less than other complex strategy.
Traders who are more experienced should use strategies having more than two tails. Although it’s very complex but it reduces risk more than basic strategies and also increased profit potential.
Investors who are reluctant to take high risk should use strategies have capped risk. Some of those are – bear call spread, bear put spread, straddle, strangle.
Investors who wants to take risk can go for short call, short put, short straddle , short strangle.
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Conclusion.From the whole study we get to know that well specified strategies are mow much important to get well return from your option contract. Although all the strategies are not useful for unlimited profit potential but it can be use as a risk hedging techniques.
According to my understanding if an investor wants low risk, then he should buy call option when market is upward as there is low risk then selling put option. Similarly in bearish market investor should buy put option rather than selling call option.
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