FINANCIAL DERIVATIVE

OPTION STRAT
DERIVATIVES ASSIGNMENT

TION STRATEGIES

Submitted By:
Anubhav Khurana - 80303190072

Vaibhav Wadhwa - 80303190146

 Q.1 NIFTY IS TRADING AT 10800 POINTS

Trader's market view - Moderately Bullish

Near month NIFTY call 10800 strike trading @ Rs. 190
Near month NIFTY call 11000 strike trading @ Rs. 105

Construct a strategy with pre-defined risk and reward, i.e. Maximum profit & maximum los

Solution: The case requires the use of a strategy called BULL CALL SPREAD

i) When the view is moderately Bullish, Bull Cap Spread is Used

ii) It is an options trading strategy designed to benefit from a stock's limited increase in price. 

iii) Two Call Options are used to create a range consisting of a lower strike price and an upper strike price.

iv) The bullish call Spread help to limit Losses & cap Gains.

The following two steps need to be taken to build a BULL CALL SPREAD:

i) Buying a call option for a strike price which is above the current market with a specific expiration date and pay the premium.

ii) Simultaneously, sell a call option at a higher strike price that has the same expiration date as the first call option.

Thus, in our case we will :

LONG NIFTY CALL 10800 STRIKE @ Rs. 190

SHORT NIFTY CALL 11000 STRIKE @ Rs. 105

STRATEGY PAYOFF:

i) Strategy is profitable when Closing NIFTY > (Lower strike call + Net premium paid)

Closing NIFTY > (10800 + (190-105))

Closing NIFTY > 10885

ii) Maximum profit = (Higher strike - lower strike) - Net premium difference

Maximum profit 115

iii) Maximum loss = Premium paid

Maximum loss 85
SCENARIO ANALYSIS AT VARIOUS LEVELS:

PAYOFF AND NET GAIN ON LONG CALL

BUY NIFTY CALL 10800 STRIKE @ Rs. 190

CASE SETTLEMENT PRICE STRIKE PAYOFF ON EXPIRY PREMIUM

1 10000 10800 0 190

2 10250 10800 0 190
3 10500 10800 0 190
4 10750 10800 0 190
5 11000 10800 200 190
6 11250 10800 450 190
7 11500 10800 700 190
8 11750 10800 950 190
9 12000 10800 1200 190

INTERP

i) We can observe from the above payoff table that the maximum profit &
maximum cap on the profits & a minimum floor on Loss

ii) Gains are limited given the net cost of the premiums for the two call o

iii) For small changes in stock price near the strike price, the price of a st
of Call & -ve Delta of Put Offset each other.
mum profit & maximum loss is known in advance

NETGAIN/LOSS
150

100 115 115

r strike price.

50
EAD:

ration date and pay the premium.

0
9500 10000 10500 11000 1
as the first call option.

-50

-100 -85 -85 -85 -85

premium paid)

nce
 PAYOFF AND NET GAIN ON SHORT CALL

SELL NIFTY CALL 11000 STRIKE @ Rs. 105

NET GAIN SETTLEMENT PRICE STRIKE PAY OFF ON EXPIRY

-190 10000 11000 0

-190 10250 11000 0
-190 10500 11000 0
-190 10750 11000 0
10 11000 11000 0
260 11250 11000 -250
510 11500 11000 -500
760 11750 11000 -750
1010 12000 11000 -1000

at the maximum profit & maximum loss is known in advance, i.e. there is a
r on Loss

miums for the two call options

e price, the price of a straddle does not change very much because the +ve Delta
 SETTLEMENT PRICE
TGAIN/LOSS
10000
10250
10500
10750
115 115 115 115 115
11000
11250
11500
11750
12000

11000 11500 12000 12500

PREMIUM NET GAIN NETGAIN/LOSS

105 105 -85

105 105 -85
105 105 -85
105 105 -85
105 105 115
105 -145 115
105 -395 115
105 -645 115
105 -895 115
NETGAIN/LOSS

-85
-85
-85
-85
115
115
115
115
115
 Q.2 NIFTY IS TRADING AT 10800 POINTS

General view - Markets will be very volatile (Could move in either direction)
Near month NIFTY call 10900 strike trading @ Rs. 80
Near month NIFTY put 10900 strike trading @ Rs. 90

Construct an ideal strategy with unlimited profits & limited loss potential

Solution: In the above case, we can employ LONG STRADDLE

i) A long straddle strategy is used when the investor expects market to be very volatile and they could move in either direction

ii) In this strategy the trader purchases both a long call and a long put on the same underlying asset with the same expiration date

iii) Since calls benefit from an upward move, and puts benefit from a downward move in the underlying security, both of these comp

iv) The main motive of this strategy is to realise profits & then put a minimum limit on the losses that could be incurred
(UNLIMITED PROFITS & LIMITED RISK)

The following two steps need to be taken to build a LONG STRADDLE:

i) Buy a call option for a strike price above the current market with a specific expiration date and pay the premium.

ii) Buy a put option for the same strike as the call option with a specific expiration date and pay the premium

Thus, in our case we will :

LONG NIFTY CALL 10900 STRIKE @ Rs. 80

LONG NIFTY PUT 10900 STRIKE @ Rs. 90

STRATEGY PAYOFF:

i) Profit when price of NIFTY is increasing is given by:

PROFIT = Price of underlying asset - strike price of call option - net premium paid
ii) Profit when price of NIFTY is decreasing is given by:

PROFIT = Strike price of put option - price of underlying asset - net premium paid
iii) Maximum risk is the total cost to enter the position, which is the price of call option plus the price of put option

Maximum loss 170

SCENARIO ANALYSIS AT VARIOUS LEVELS:

PAYOFF AND NET GAIN ON LONG CALL

BUY NIFTY CALL 10900 STRIKE @ Rs. 80

CASE SETTLEMENT PRICE STRIKE PAYOFF ON EXPIRY PREMIUM GAIN/LOSS

1 9000 10900 0 80 -80

2 9500 10900 0 80 -80
3 10000 10900 0 80 -80
4 10500 10900 0 80 -80
5 10900 10900 0 80 -80
6 11500 10900 600 80 520
7 12000 10900 1100 80 1020
8 12500 10900 1600 80 1520
9 13000 10900 2100 80 2020

PAYOFF
2500

2000 1930
1730

1500 1430
Net Gain / Loss

1230

1000 930
730

500 430
230

0 -170
4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000

-500

Settlement Price
r direction)

ey could move in either direction

asset with the same expiration date and strike price.

derlying security, both of these components cancel out small moves in either direction

s that could be incurred

nd pay the premium.

y the premium

ion - net premium paid

set - net premium paid

plus the price of put option
 PAYOFF AND NET GAIN ON LONG PUT

BUY NIFTY PUT 10900 STRIKE @ Rs. 90

GAIN/LOSS SETTLEMENT PRICE STRIKE PAY OFF ON EXPIRYPREMIUM GAIN/LOSS

9000 10900 1900 90 1810

9500 10900 1400 90 1310
10000 10900 900 90 810
10500 10900 400 90 310
10900 10900 0 90 -90
11500 10900 0 90 -90
12000 10900 0 90 -90
12500 10900 0 90 -90
13000 10900 0 90 -90

INTERP

i) The market does not react strong enough to change th

close on the day of entering the contract.

ii)
The loss potential is known & the profit potential is un

iii) For small changes in stock price near the strike price,
much because the +ve Delta of Call & -ve Delta of Put
 NET GAIN/LOSS

1730
1230
730
230
-170
430
930
1430
1930

act strong enough to change the prices drastically, The price remains
ering the contract.

own & the profit potential is unlimited if the prices change direction strongly.

ock price near the strike price, the price of a straddle does not change very
Delta of Call & -ve Delta of Put Offset each other.
trongly.
 Q.3 RANGE BOUND MARKETS

NIFTY IS TRADING AT 10800 POINTS

General view - Markets will be in the range of 10350 to 10450

Near month NIFTY call 10500 strike trading @ Rs. 130
Near month NIFTY put 10300 strike trading @ Rs. 140

Construct an ideal strategy and illustrate maximum profit & maximum loss for the strat

Solution: In the above case, we can employ SHORT STRADDLE

i) Employed when view is 'No sharp directional moves & market expected to be in Broad Range'

ii) In this strategy the trader purchases both a call and a put on the same underlying asset with the same expiration date but d

iii) This is apllied when there is Limited Profit potential i.e upto the sum of their premium & Unlimited Loss Potential.

iv) Applied when both the options are Out Of Money

The following two steps need to be taken to build a SHORT STRADDLE:

i) Sell Call Option when Strike Price > CMP & receive Premium.

ii) Sell Put Option when Strike Price < CMP & receive premium.

Closing Spot Price

Strike Price Premium 9800 10000 10030 10200 10400
Sell Call 10500 130 130 130 130 130 130
Sell Put 10300 140 -360 -160 -130 40 140
Net payoff -230 -30 0 170 270

Closing Spot Price 9800 10000 10030 10200 10400 10600

Net payoff -230 -30 0 170 270 170

Net payoff
300

200
Profit/Loss

100

0 Net payoff
9600 9800 10000 10200 10400 10600 10800 11000 11200
-100

-200

-300

Closing Spot Price

 Pro
-100

-200

-300

Closing Spot Price

INTERPRETATION

1 The Maximum profit in this case is 270. However the Loss potential is unlimited.

2 The Profit is maximum in the Middle of the Range

 imum loss for the strategy

th the same expiration date but different strike price.

mited Loss Potential.

pot Price
10600 10700 10770 10800 11000 11200
30 -70 -140 -170 -370 -570
140 140 140 140 140 140
170 70 0 -30 -230 -430

10700 10770 10800 11000 11200

70 0 -30 -230 -430

Net payoff
0 11200
unlimited.
 Q.4 MARKET VOLATILITY TO SUBSIDE AND LIMITED MARKET MOVEMENTS

NIFTY IS TRADING AT 10800 POINTS

Assume your own option premium charges for ATM, ITM, OTM options, in a range of Rs

Construct a multiple strategy to minimize loss if the trader initially wants to go for shor

Solution:

Closing Spot Price

Strike Price Premium 9800 10000 10200 10400
Sell Call 10800 150 150 150 150 150
Sell Put 10800 150 -850 -650 -450 -250
Net payoff -700 -500 -300 -100

Closing Spot Price 9800 10000 10200 10400 10600

Net payoff -700 -500 -300 -100 100

Net payoff
400 300

200 100 100

0 -100 -100
9800 10000 10200 10400 10600 10800 11000 11200 1
-200 -300

-400 -500

-600 -700

-800

Closing Spot Price

LONG POSITION

Closing Spot Price

Strike Price Premium 9800 10000 10200 10400
Buy Call 10900 100 -100 -100 -100 -100
Buy Put 10700 100 800 600 400 200
Net payoff 700 500 300 100
 Closing Spot Price 9800 10000 10200 10400 10600
Net payoff 700 500 300 100 -100

Net payoff
800 700

600 500

400 300 300

P&L

200 100 100

0 -100 -100
9800 10000 10200 10400 10600 10800 11000 11200 11400
-200
-200

-400

Closing SPot PRICE

COMBINING BOTH THE STRATEGIES

Spot Price 9800 10000 10200 10400 10600 10800
Butterfly Payoff 700 500 300 100 -100 -200
Short Straddel Payoff -700 -500 -300 -100 100 300
Net pay off 0 0 0 0 0 100

Net pay off

120

100
100

80

60

40

20

0 0 0 0 0 0 0 0 0
0
9800 10000 10200 10400 10600 10800 11000 11200 11400 11600
20

0 0 0 0 0 0 0 0 0
0
9800 10000 10200 10400 10600 10800 11000 11200 11400 11600
ons, in a range of Rs.100-Rs.300

wants to go for short straddle under the given circumstances

t Price
10600 10800 11000 11200 11400 11600
150 150 -50 -250 -450 -650
-50 150 150 150 150 150
100 300 100 -100 -300 -500

10800 11000 11200 11400 11600

300 100 -100 -300 -500

100

11000 -100
11200 11400 11600

-300

-500

t Price
10600 10800 11000 11200 11400 11600
-100 -100 0 200 400 600
0 -100 -100 -100 -100 -100
-100 -200 -100 100 300 500
 10800 11000 11200 11400 11600
-200 -100 100 300 500

500

300

100

-100
11000 11200 11400 11600

11000 11200 11400 11600

-100 100 300 500
100 -100 -300 -500
0 0 0 0

Combining Both The Strategies

800
700
600
500 500
400
300 300 300
200
Axis Title

100 100 100 100

0
9800 10000 10200 10400
-100 10600
-100 10800 11000
-100 11200
-100 11400 11600
-200 -200
-300 -300
-400
-500 -500
-600
-700
-800
Axis Title
0
11600 Butterfly Payoff Short Straddel Payoff
 -600
-700
-800
Axis Title
0
11600 Butterfly Payoff Short Straddel Payoff
 500

300

100
11200
-100 11400 11600

-300

-500