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A Project report On OPTIONS TRADING
At Shubham Stocks, Belgaum Submitted to: Karnatak University, Dharwad By Priyadarshan D.Desai MBA04003014
Under the guidance of: Mr. Girish Saraf Branch in-charge. Shubham Stocks, Belgaum
Internal Guide Prof: R. R. Gondkar
KLSs Institute Of management Education And Research, Belgaum
KARNATAK LAW SOCIETYS INSTITUTE OF MANAGEMENT EDUCATION AND RESEARCH. BELGAUM.
A PROJECT REPORT ON OPTIONS TRADING Submitted to: KARNATAK UNIVERSITY DHARWAD IN PARTIAL FULFILLMENT OF MASTER OF BUSINESS ADMINISTRATION By: PRIYADARSHAN D.DESAI MBA04003014
UNDER THE GUIDANCE OF
INSTITUTE GUIDE
ORGANISATION GUIDE
Prof. R R GONDKAR
Mr. GIRISH SARAF
KARNATAK LAW SOCIETYS INSTITUTE OF MANAGEMENT EDUCATION AND RESEARCH, BELGAUM.

(Affiliated to Karnatak University, Dharwad & Recognized by AICTE, New Delhi)
CERTIFICATE
This is to certify that Mr. Priyadarshan D Desai has satisfactorily completed his Concurrent project on year 2005-2006. Options trading in the partial fulfillment of the Requirement of Masters of Business Administration, during the academic
GUIDE (Prof.R.R.Gondkar) Charanthimath)
DIRECTOR (Dr. Poornima.M.
DECLARATION I. Priyadarshan D. Desai hereby declare that work on project entitled

Options Trading carried out at Shubham Stocks, Belgaum is written and submitted by me to Karnatak University, Dharwad, under the guidance of Prof R. R Gondkar as per the requirement of the curriculum of Masters of Business Administration course of Karnatak University, Dharwad.
All the findings in this report are purely based on the data collection methods, i.e. through primary data with the help of questionnaires during my visits to the company and through secondary data with the help of websites and newspapers.
PLACE: BELGAUM DATE: 04/04/ 06
PRIYADARSHAN D.DESAI REG NO: MBA04003014
ACKNOWLEDGMENT
I take this opportunity to express my deep sense of gratitude to Mr. Girish Saraf (BRANCH INCHARGE) for his kind permission to undertake this project at the organization.
I am thankful to Mr. Amit Jadhav for giving guidance and supervision during the duration of my project. I am also thankful to employees of Shubham stocks for valuable inputs . encouragement. I thank Miss Priya Mudakavi for helping me and leading me to complete the project successfully. I also extend my sincere gratitude to our director Dr. Poornima Charantimath for her constant support and motivation, and also Prof. R R Gondkar for being such a wonderful college guide. Finally I would like to thank all my family and friends who have helped directly or indirectly in completion of this project. I thank Prof.Anilkumar Garag for guiding me with valuable inputs and
Date: 03-04-2006 Place: Belgaum PRIYADARSHAN D.DESAI
EXECUTIVE SUMMARY.
Title of the project:

Options Trading To understand what options are and to know how options are traded in
the market Objective of study To study the analysis of the options at NSE. To know the advantages of and disadvantages of options To know the settlement of option at NSE To know awareness of Options trading in Belgaum Use of black and Scholes model in options.
To study the investor awareness in options, Questionnaire was designed to seek the responses Methodology Data collected through questionnaire and observation and internet, newspapers magazines. Limitations: Project of two months with two days in week, information only through Selected investors from Belgaum A sample size of 50 investors was chosen
TABLE OF CONTENTS
Contents Company Profile History of Options Financial Derivatives What is an option? Settlement of Options at NSE Black and Scholes model Assumptions of black and Scholes Models Difference Advantages of Options Trading Data Analysis and findings Interpretations and Recommendations Conclusion Pages No. 8 9 14 20 28 33 35 36 39 40 44 45
Sr.No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
1. COMPANY PROFILE
PROGRESSIVE SHARE BROKERS PVT LTD Progressive offers trading in equity as well as futures and option market, financial risk management, financial advisory and investment related research service. A key feature of its operations is its commitment towards following globally accepted standard in terms of accounting, front and back office separation, risk management principles and systems, client level reporting, surveillance and compliance over the board and transparent ordering, acceptance execution and confirmation procedures. Following are some of the major services offered: Stock broking services in capital market segment of National Stock Exchange of India. Stock broking services in future and options segment of National Stock Exchange of India. Stock broking services in Mumbai Stock Exchange through our associate concern media investments. Investment Management Consultancy Services. Risk Management Consultancy services. To cater to the growing need of investors all over India, PROGRESSIVE SHARE BROKERS PVT LTD, have set up extensive branch network. The main object of PROGRESSIVE is to spread the equity cult all over India and provide platform to investors residing in remote areas to BUY and SELL equity. To meet this objective, company has set up extensive branch network. PROGRESSIVE has set up branches at Jorhat and Tinsuka in extreme Northeast to Jamnagar in west, Meerut in North to Belgaum in South. Location Registered Office: 0 32, 3rd floor, Amber tower, S.C. Road, Jaipur 302 001.
2. HISTORY OF OPTIONS
Although it isnt known exactly when the first option contract traded, it is known that the Romans and Phoenicians used similar contracts in shipping. There is also evidence that Thales, a mathematician and philosopher in ancient Greece used options to secure a low price for olive presses in advance of the harvest. Thales had reason to believe the olive harvest would be particularly strong. During the off-season when demand for olive presses was almost nonexistent, he acquired rights-at a very low cost-to use the presses the following spring. Later, when the olive harvest was in full swing, hales exercised his option and proceeded to rent the equipment to others at a much higher price. In Holland, trading in tulip options blossomed during the early 1600s.At first; tulip dealers used call options to make sure they could secure a reasonable price to meet the demand. At the same time, tulip growers used put options to ensure an adequate selling price. However, it wasnt long before speculators joined the mix and traded the options for profit. Unfortunately, when the market crashed, many speculators failed to honour their agreements. The consequences for the economy were devastating. Not surprisingly, the situation in this unregulated market seriously tainted the view most people had of options. After a similar episode in London one hundred years later options were even declared illegal.
Early Options in America In America, options appeared on the scene around the same time as stocks. In the early 19 th century, call and put contracts-known as privileges-were not traded on an exchange. Because the terms differed for each contract, there was not much in the way of a secondary market. Instead, it was up to the buyers and sellers to find each other. This was typically accomplished when firms offered specific calls and puts in newspapers ads.
Not unlike what happened in Holland and England, options came under heavy scrutiny after the great depression. Although the investment Act of 1934 legitimized options, it also put trading under the watchful eye of the newly formed Securities and Exchange Commission (SEC) For the next several decades, growth in option trading remained slow. By 1968, annual volume still did not exceed 300000 contracts. For the most part, early over-the-counter options failed to attract a following because they were cumbersome and illiquid. In the absence of an exchange, all trades were done by phone. To make matters worse, investors had no way of knowing what the real market for a given contract was.Instead, the put-call dealer functioned only to match the buyer and seller. Operating without a fixed commission, the dealer simply kept the spread between the price paid and the price sold. There was no limit to the size of the spread. Worse yet, all option contracts had to be exercised in person. If the holder of the option somehow missed the 3.15pm deadline, the option would expire worthless regardless of its intrinsic value.
Chicago Board of Trade

In the late 1960s as exchange volume for commodities began to shrink, the Chicago Board of trade (CBOT) explored opportunities for diversification into the options market. Joseph W.sullivan, Vice President of planning for the CBOT, studied the over-the-counter option market and concluded that two key ingredients for success were missing. First, Sullivan believed that existing options had too many variables. To correct this, he proposed standardizing the strike price, expiration, size and other relevant contract terms.Second, Sulivan recommended the creation of an intermediary to issue contracts and guarantee settlement and performance. This intermediary is now known as the Options Clearing Corporation. To replace the put-call dealers, who served only as intermediares, the CBOT created a system in which market makers were required to provide two sided markets. At the same time, the presence of multiple market makers made for a competitive atmosphere in which buyers and sellers alike could be assured of getting the best possible price KLSs Institute Of management Education And Research, Belgaum 10
Chicago Board Options Exchange(CBOE)

After four years of study and planning, the Chicago Board of Trade established the Chicago Board Options Exchange(CBOE) and began trading listed call options on 16 stocks on April 26,1973.The CBOEs first home was actually a smokers lounge at the Chicago Board of Trade. After achieving first-day volume of 911 contracts, the average daily volume rocketed to over 20,000 the following year. Along the new exchange achieved several important milestones. S the number of underlying stocks with listed options doubled to 32, exchange membership doubled from 284 to more than 600.About the same time, new laws opened the door for banks and insurance companies to include options in their portfolios. For these reasons, option volume continued to grow. By the end of 1974, average daily volumes exceeded 200,000 contracts. The newfound interest in options also caught the attention of the nations newspapers, which voluntarily began carrying listed option prices. Thats quite an accomplishment considering that the CBOE initially had to purchase new space in The Wall Street Journal in order to publish quotes
The Emergence of Put trading

After repeated delays by the SEC, Put trading finally began in 1977.determined to monitor the situation closely, the SEC, only permitted puts to be traded on five stocks. Despite the rapid acceptance of puts and the rising interest in options, the.SEC imposed a moratorium halting the listing of additional options. Nevertheless, annual volume at the CBOE reached 35.4 million in 1979. Today option volume and open interest is climbing continuously 2003 the number of open contracts reached more than 80 million.
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New players
Starting in 1975,a number of other exchanges began trading listed options.This group included the American Stock Exchange(AMEX),the Philadelphia Stock Exchange(PHE).The most recent player to enter the game is the International Stock Exchange (ISE) Although the ISC only trades options on a limited number of stocks, the list is literally growing every day. Today, options on all sorts of financial instruments are also traded at the Chicago Mercantile Exchange, the CBOT and other exchanges
Employee Stock Options

With the rapid growth in internet companies over the past few years and the enormous wealth created by employee stock options, more and more people are developing an interest in the concept of owning and trading options. Although there are fundamental differences between the options granted to an employee by a company and the options traded on the floor of an exchange, there are important similarities. When a company grants stock options to an employee, it gives that person the right to buy a certain number of shares at a price often well below market value. Although the options granted by a company eventually expire, they are usually good for extended periods(eg,10 years).Generally speaking, options issued by the company are not transferable.Therefore,they cannot be sold or traded to a third party.However,if the company is publicly traded, the employee can exercise the options and convert it to stock. This stock can then be sold on the open market. If we take an example, a person having option to buy 500 shares at strike price of Rs10 per share when the stock is actually trading at Rs 50.In this case, the person pays Rs 5000 for stock that is worth Rs 25000 on the open market. Indeed a good deal.
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Exchange Traded Options

Although there are a variety of different types of options, this section will focus on stock options once you understand the basic principles, they can easily be applied to the other financial instruments.Exhange-traded stock options, also known as equity options, differ from those granted to employees by their company in a number of important ways First, they typically have shorter term expirations. Options granted by companies are often good for several years. During that period, they can be exercised at any point.However, employee stock options cannot usually be sold or transferred. In contrast, exchange traded options (with exception of LEAPS) are generally valid for only a few months and can be bought or sold at any prior to expiration. To many people, it seems odd that exchange-traded options are not issued by the companies themselves. Instead, they are issued by the options clearing Corporation (OCC) by centralizing and standardizing options trading, the OCC has created a more liquid market Unless otherwise specified, each option contract controls 100 shares of stock. In simplest terms, an option holder has the right, but not the obligation, to buy or sell a particular stock at a set price on or before the day of expiration. For example, someone holding a Wipro march 65 call would have the right to buy 100 shares of wipro for Rs65 per share.Likewise, a Wipro 65 put gives the holder the right to sell 100 shares of Wipro for Rs65 per share.
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3. FINANCIAL DERIVATIVES
Financial derivatives are financial instruments whose prices are derived fro the prices of other financial instruments .They include forwards,futures,options and swaps.The Instruments to which they relate include stocks,bonds,interest rates and currencies. The Derivatives can be compared to an insurance policy.as one pay premium in advance to an insurance company in protection against a specific event, the derivatives products have a payoff contingent upon the occurrence of some event for which one pay premium in advance. For example, a person buys 1000 shares of a company for 20000 at Rs20/- anticipating he share price to go up to Rs 50 in months time. If the share price increases to Rs50/- then he gets a margin of Rs30 per share giving him a total profit of Rs30000.But if the price Falls to 10/- then he losses Rs.10000 .Now, instead of buying those shares if he buys a call option on these shares then he will get an option but not an obligation to buy those shares in a months time at a payment of say 2000//-So,he stands to gain Rs30000-Rs2000 =Rs28000 in case the price moves up according to his expectations but he stands to lose just Rs2000 in case of a fall in price. A lot of people have this notion that derivatives are a completely new phenomenon. They may have become popular now but their origin can be traced back to Aristotlewritings.Aristotle tells the story of tales a poor philosopher who developed a financial device which he said could be univocally applicable.Thales had great skill in forecasting and predicting how good the harvest would be in the autumn. Confident about his prediction, he made agreements with area olive press owned to deposit what little money he had with them to guarantee him area exclusive use of their olive presses when the harvest was ready.Thales successfully negotiated low prices because the harvest was in future and no one knew whether the harvest would be plentiful or worse and because the olive press owned were willing to hedge against the possibility of a poor yield and these contracts were exercised some 2500 years ago. How about that? This indicate that derivatives are not a new concept at all, although, for India it is still a relatively recent phenomenon. Another myth surrounding derivatives is that it is a gambling well, not really. The extensive use of derivatives in recent years was brought about by three primary sources more volatile market deregulation and new technologies. After the breakdown of fixed rate of international currency KLSs Institute Of management Education And Research, Belgaum 14
exchange regime in the 1970s there was a high volatility in the most of the economies. The bank and other financial intermediaries respondent to the new environment by developing financial risk management products design to control risk more efficiently. To serve customer better, they offered an ever increasing no of novel products design to manage and control financial risk more effectively. New technology quickened the phase of innovation provided bank with superior methods for trading and stimulating ther own derivative portfolios. Well, all said and done derivatives are still to edge sword and have ther won draw backs. But they can be over come to extent by following certain basic rules by the regulating body. Fit of all enhancing the confidence and knowledge among all market participants is a necessary condition in order to maintain stability of the derivative market. Secondly information regarding the derivatives standardized so that it can be undertook by every class of use and should also be disclosed at all levels of the derivatives industry. And lastly, the reputation of the market participants in the derivative business should be used a monitoring device to prevent them from adopting excessively risky policies or fro engaging in an irregular transaction. If the above points were taken care of, then the derivatives would be a major boost for entrepreneurship, particularly for a country like India because the basis of entrepreneurship is risk taking and nothing can be better than higher return with the risk aspect being taken care of.
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Stock Option A stock option is a contract to buy (known as a Call contract) or sell (known as a put contract) securities, often shares of stock, at a predetermined or calculable (from a formula in the contract) price. For example I may own an option to buy a share in XYZ corp. for Rs. 100 in one months time. If the actual stock price at the time is Rs. 105 then I would exercise (i.e. use) my option and buy a stock from whoever sold me the option for Rs. 100. I could then either keep the stock, or sell it in the open market for Rs. 105, realizing a profit of Rs. 5. However if in one months time the stock price was only Rs. 95, I would not exercise my option, as if I really wanted a share in XYZ Corp, I could buy it in the open market for Rs. 95 rather than using my option to buy it for Rs. 100. Thus if I have an option, I might a profit and am certain not to make a loss. This means an option must have some positive monetary value itself. The problem of calculating exactly the how much that option is worth has been the subject of much academic and practical interest for the last 40 years. The most popular method used in the finical markets is to use the BlackSchools formula, but this depends on the option style. Options themselves are traded as securities on stock exchanges. Stock options for the companys own stock are often offered to upper-level employees as part of the executive compensation package, especially by American business corporations Because stock prices are related to corporate earning, the granting of stock options gives an employee an incentive to increase earnings, either in reality or possibly by the use of creative accounting. It is estimated that over reporting of income by an average of 25% by American corporations was one cause of the Stock Market Downturn of 2002.
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Derivative Security In finance, a derivative security or derivative is a contract which specifies the right or obligation between two parties to receive or deliver future cash flows (or exchange of other securities or assets) based on some future event. Another way of defining a derivative is that it is a security whose value is determined (derived) from one or more other securities, commodities, or events. The value is influenced by the features of the derivative contract, including the timing of the contract fulfillment, the value of the underlying security or commodity, and other facto like volatility. The payments between the parties may be determined by the future changes of: the price of some other, independently traded asset in the future (e.g., a common stock) The level of some index (e.g., a stock index or heating-degree-days) the occurrence of some well specified event (e.g. a company defaulting) some derivatives are the right to buy or sell the underlying security or commodity security or commodity moves into the right direction, the owner of the derivative makes money, otherwise they lose money. Depending on the definition of the contract, the potential loss or gain may be much higher than if they had traded the underlying security or commodity directly. Common examples of derivatives are Stock options Interest rate swaps Futures Foreign exchange forwards or options Credit default swaps Some less common, but economically intriguing examples are :
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Economic derivative which pay off according to the state of the economy as measured by national statistical agencies. Weather derivatives Derivatives are one of the most rapidly growing and changing areas of modern fianc. According to the BIS (Bank for International Settlements), as of December 2002, the total estimated national amount of outstanding OTC contracts stood at Rs. 141.7 trillion. The most common use of derivative securities is as a tool to buy and sell risk. For example, a farmer may seek to sell a future in a commodity such as wheat at a fixed price to a speculator. The farmer reduces his risk that the price of wheat will unexpectedly raise or fall, and the speculator assumes this risk with the possibility of a large reward. Because derivative securities offer the possibility of large rewards, many individuals have the strong desire to invest in derivative securities. Most financial planner caution against this, pointing out that an investor in derivative securities often assumes a great deal of risk and therefore investments in derivatives must be made with caution. Economist generally believes that derivatives have a positive impact on the economic system by allowing the buying and selling of risk. However, many economists are worried that derivatives may cause an economic crisis at some point in the future. Since with a derivative security, someone loses money while someone else gains money, under normal circumstances trading in derivatives should not adversely affect the economic system. There is a danger, that someone would lose so much money that they would be unable to pay for their losses. There is a danger that this would cause chain reactions which could create an economic crisis. In commented that he had accumulated his wealth without the use of derivatives and that he regarded them as financial weapons of mass destruction, an allusion to the phrase weapons of mass destruction relating to physical weapons which had wide currency at the time. Although there have been instances of massive losses, most notably by long term capital management these have not have repercussive effects. In fact Federal Reserve Board Chairman Alan Greenspan commented in KLSs Institute Of management Education And Research, Belgaum 18
2003 that he believed that the use of the use of derivatives have softened the impact of the economic downturn at beginning of the twenty-fit century. This kind of investment gained a great deal of notrity in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in derivatives. Through a combination of poor judgment on his part, lack of oveight by management and unfortunate outside events, leeson incurred a 1.3 billion dollar loss that bankrupted the centuries old financial institution. Forward Contract A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. One party agrees to buy, the other to sell, for a forward price agreed in advance. In a forward transaction, no actual cash changes hands. If the transaction is collaterised, exchange of margin will take place according to a pre-agreed rule or schedule. Otherwise no asset of any kind actually changes hands, until the maturity of the contract. The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset changes hands (on the spot date, usually next business day).
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4. WHAT IS AN OPTION?
The idea of options is certainly not new. Ancient Romans, Grecians, and Phoenicians traded options against outgoing cargoes from their local seaports. When used in relations to financial instruments, options are generally defined as a contract between two parties in which one party has the right but not the obligation to do something, usually to buy or sell some underlying asset. Having rights without obligations has financial value, so option holders must purchase these rights, making them assets. This asset derives their value from some other assets; of they are called derivative assets. Call options are contracts giving the option holder the right to buy something, while put options, conversely entitle the holder to sell something. Payment for call and put options take the form of a flat, up-front sum called a premium. Options can also be associated with bonds (i.e. convertible bonds and callable bonds), where payments occur in installments over the entire life of the bond, but his paper is only concerned with traditional put and call options.
Origins of Options Pricing Techniques: Modern option pricing techniques, with roots in stochastic calculus, are often considered among the most mathematically complex of all applied areas of finance. These modern techniques derive their impetus from a formal history dating back to 1877, when Charles castelli wrote a book entitled the Theory of options in stocks and shares. Castellis book introduced the public to the hedging and speculations aspects of options, but lacked any monumental theoretical base. Twenty-three years later, Louis Bachelier offered the earliest known analytical valuation for options I his mathematics dissertation Thorie de la sp,culation at the Sorbonne. He was on the right track, but he used a process to generate share price that allowed both negative security prices and option prices that exceeded the price of the underlying asset Baseliners work interested a professor at MIT named Paul Samuelson, who in 1955 wrote an unpublished paper entitled Brownian Motion in the stock Market during that same year, Richard Kruizenga, one of Samuelsons students, cited Bacheliers works in his dissertation entitled Put and call options: KLSs Institute Of management Education And Research, Belgaum 20
A theoretical and Market Analysis. In 1962, another dissertation, this time by A. James Boness, focused on Options. In his work, entitled A theory and Measurement of Stock Option Value Boness developed a pricing model that made a significant theoretical jump from that of his predecessors. More significantly, his work served as a precursor to that of Fischer Black and Myron Scholes, who in 1973 introduced their landmark option-pricing model. What is option Greeks? The price of an Option depends on certain factors like price and volatility of the underlying, time to expiry etc. The options Greeks are the tools that measure the sensitivity of the option price to the above-mentioned factors. They are often used by professional traders for trading & managing the risk of large positions in options & stocks. These Option Greeks are: Delta: Is the option Greek that measures the estimated change in option premium/price for a change in the price of the underlying. Gamma: Measures the estimated change in the Delta of an option for a change in the price of the underlying Vega: measures the estimated change in the option price for a change in the volatility of the underlying. Theta: measures the estimated change in the option price for a change in the time to option expiry. Rho: measures the estimated change in the option price for a change in the risk free interest rates
What is S&P CNX Nifty? S&P CNX Nifty (Nifty) is a 50 stock index comprising the largest and the most liquid companies in India. Nifty covers nearly 23sectors of the economy and a market capitalization of almost60% of the total market capitalization of the Indian stock market. The ownership and management rights of this index rests with India Index Services & Products Ltd. (IISL), a corporate body jointly promoted by NSE and the Credit Rating and Information Services of India Ltd. (CRISIL), a leading rating agency in India.IISL has a co-branding and licensing agreement with Standard& Poor's (S&P) one of the world's leading index services providers. Nifty is a scientifically developed market capitalization weighted index with the advantage of technical. Oversight by S&P. Nifty was developed keeping in mind that an index besides being a true reflection of the KLSs Institute Of management Education And Research, Belgaum 21
stock market should also be used for modern applications such as index funds and index derivatives. Options - Cross currency options The Reserve Bank of India has permitted authorized dealers to offer cross currency options to the corporate clients and other interbank counter parties to hedge their foreign currency exposures. Before the introduction of these options the corporates were permitted to hedge their foreign currency exposures only through forwards and swaps route. Forwards and swaps do remove the uncertainty by hedging the exposure but they also result in the elimination of potential extraordinary gains from the currency position. Currency options provide a way of availing of the upside from any currency exposure while being protected from the downside for the payment of an upfront premium. RBI Regulations: These contracts were allowed with the following conditions:
These currency options can be used as a hedge for foreign currency loans provided that the option does not involve rupee and the face value does not exceed the outstanding amount of the loan, and the maturity of the contract does not exceed the un-expired maturity of the underlying loan.
Such contracts are allowed to be freely rebooked and cancelled. Any premia payable on account of such transactions does not require RBI approval Cost reduction strategies like range forwards can be used as long as there is no net inflow of premia to the customer. Banks can also purchase call or put options to hedge their cross currency proprietary trading positions. But banks are also required to fulfill the condition that no 'stand alone' transactions are initiated.
If a hedge becomes naked in part or full owing to shrinking of the portfolio, it may be allowed to continue till the original maturity and should be marked to market at regular intervals. KLSs Institute Of management Education And Research, Belgaum 22
Rupee currency options Corporates in India can use instruments such as forwards, swaps and options for hedging crosscurrency exposures. However, for hedging the USD-INR risk, corporates are restricted to the use of forwards and USD-INR swaps.
An American style option is the one which can be exercised by the buyer on or before the expiration date, i.e. anytime between the day of purchase of the option and the day of its expiry.
The European kind of option is the one which can be exercised by the buyer on the expiration day only & not anytime before that. In Indian Derivatives market, SEBI has not created any particular category of options writers. Any market participant can write options. Option writing however, is a specialized job, which is suitable only for the knowledgeable investor who understands the risks, has the financial capacity and willingness to incur potentially substantial losses, and has sufficient liquid assets to meet applicable margin requirements. The risk of being an option writer may be reduced by the purchase of other options on the same underlying interest-and thereby assuming a spread position-or by acquiring other types of hedging positions in the options markets or other markets A call option position that is covered by an opposite position in the underlying instrument (for example shares, commodities etc) is called a covered call. Writing covered calls involves writing call options when the shares that might have to be delivered (if option holder exercises his right to buy), are already owned. E.g. a writer writes a call on Reliance and at the same time holds shares of Reliance so that if the buyer exercises the call, he can deliver the stock. Covered calls are far less risky than naked calls (where there is no opposite position in the underlying), since the worst that can happen is that the investor is required to sell shares already owned at below their market value. When a physical delivery uncovered/ naked call is assigned an exercise, the writer will have to purchase the underlying asset to meet his call obligation and
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his loss will be the excess of the purchase price over the exercise price of the call reduced by the premium received for writing the call.
Call Option A call option is a financial contract between two parties, the buyer and the seller of the option, that allows the buyer, then owner, of the option the right but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller of the option at a certain time (or times depending on the exact specification of the contract), for a certain price, known as the strike. Selling in this context is not supplying something that the seller owns, but it means granting the buyer this right, against a fee. The most widely-known cal option is that when the option is to buy stock in a particular company. This is a stock option. However options are traded on many other quantities both financial, such as interest rates (called an interest rate cap) or foreign exchange rates (see foreign exchange option) and physical such as gold or crude oil. Example of a call option on a stock I might enter a contract to have the option to buy a share in Microsoft Corp. on June 1 2005 for Rs. 50. If the share price is actually Rs. 60 on that day then I would exercise my option (i.e. buy the share from the counter-party). I could then sell it in the open market for Rs. 60, i.e. the option would be worth Rs. 10; my profit would be Rs. 10. If however the share price is only Rs. 40 then I would not exercise the option (if really wanted to own such a share, I could buy it in the open market for Rs. 40, why waste Rs. 50 on it). My option would be worth nothing. Thus in any future state of the world, I am certain not to lose money by owning the option. This implies that the option itself must have some positive value (the price of the option). This value varies with the share price and time. The science of determining this value is the central tenet of financial mathematics. The most common method is to use the Black-Scholes formula. Whatever the method used, the buyer and seller must agree this value initially and the buyer pays the seller this value as a fee. KLSs Institute Of management Education And Research, Belgaum 24
Like in the case of share trading, buyer and seller of options do not usually interact directly with each other; the options exchange is intermediary and quotes the market value of the option. The seller has to supply a guarantee to the options exchange that he can fulfill his obligation if the buyer chooses to execute his option.
Put Option A put option is a financial contract between two parties, the buyer and the seller of the option, that allows the buyer, then owner, of the option the right but not the obligation to sell a commodity or financial instrument (the underlying) to the seller of the option at a certain time (or times depending on the exact specification of the contract) for a certain price, known as the strike. Note that the seller of the option undertakes to buy the underlying! In exchange for being granted this option, the buyer pays the seller a fee. The most widely-known put option is the option to sell stock in a particular company. This is a stock option. However options are traded on many other quantities both financial, such as interest rates (called an interest rate cap) or foreign exchange rates (see foreign exchange option) and physical such as gold or crude oil. Example of a put option on a stock I might enter a contract to have the option to sell a share in Microsoft Crop. On June 1 2003 for Rs. 50. If the share price is actually Rs. 40 on that day then I would exercise my option (i.e. sell the share from the counter-party). I could then buy another share in the open market for Rs. 40, i.e. the option would be worth Rs. 10; my profit would be Rs. 10 minus the fee I paid for the option. If however the share price is as much as Rs. 60 then I would not exercise the option (if really wanted to sell such a share, I could do so in the open market for Rs. 60). My option. Thus in any future state of the world, I am certain not to lose money by owning the option, my loss is limited to the fee I have paid. This implies that the option itself must have some positive value, the fee mentioned above. It varies with the share price. KLSs Institute Of management Education And Research, Belgaum 25
The science of determining this value us the central tenet of financial mathematics. The most common method is to use the Black-Scholes formula. The value of a put option is closely related to that of a call option. See put-call parity. Like in the case of share trading, buyer and seller of options do not usually interact directly with each other the options exchange is intermediary. The seller has to supply a guarantee to the options exchange that he can fulfill his obligations if the buyer chooses to execute his option. How can options be used? If we anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity. The decision as to what type of option to buy is dependent on our outlook for the respective security is positive (bullish) or negative (bearish). If our outlook is positive, buying a call option creates the opportunity to share in the upside potential of a stock without having to risk more than a fraction of its market value (premium paid). Conversely, if we anticipate downward movement, buying a put option will enable us to protect against downside risk without limiting profit potential. Purchasing options offer us the ability to position our self accordingly with our market expectations in a manner such that we can both profit and protect with limited risk.
Have a view on the market A. Assumption: Bullish on the market over the short term Possible Action by you: Buy Nifty calls Example: Current Nifty is 1400. You buy one contract of Nifty near month calls for Rs.30 each. at strike price of 1430, i.e.2.14% out of the money. The premium paid by you will be (Rs.30 * 200) Rs.6000. Given these, your break-even level Nifty is 1460 (1430 + 30). If at expiration Nifty advances by 5%, i.e. 1470, then Nifty expiration level 1470.00 Less Strike Price 1430.00Option value 40.00 (1470 - 1430) Less Purchase price 30 Profit per Nifty 10 Profit on the contract Rs.2000 (Rs.10* 200) Note: KLSs Institute Of management Education And Research, Belgaum 26
(1) If Nifty is at or below 1430 at expiration, the call holder would not find it profitable to exercise the option and would loose the entire premium, i.e. Rs.6000 in this example. If at expiration, Nifty is between 1430 (the strike price) and 1460 (breakeven), the holder could exercise the calls and receive the amount by which the index level exceeds the strike price. This would offset some of the cost. (2) The holder, depending on the market condition and his perception, may sell the call even before expiry. B. Assumption: Bearish on the market over the short term Possible Action by you: Buy Nifty puts Example: Nifty in the cash market is 1400. You buy one contract of Nifty near month puts for Rs.23 each. The strike price is 1370, i.e. 2.14% out of the money. The premium paid by you will be Rs.4600 (23*200). Given these, your break-even level Nifty is 1347 (i.e. strike price less the premium). If at expiration Nifty declines by 5%, i.e. 1330, then Put Strike Price 1370 Nifty expiration level 1330 Option value 40 (1370 - 1330) Less Purchase price 23 Profit per Nifty 17 Profit on the contract Rs.3400 (Rs.17* 200) Note: 1. If Nifty is at or above the strike price 1370 at expiration, the put holder would not find it profitable to exercise the option and would loose the entire premium, i.e. Rs.4600 in this example. If at expiration, Nifty is between 1370 (the strike price) and 1347 (breakeven), the holder could exercise the puts and receive the amount by which the index level exceeds the strike price. This would offset some of the cost.
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5.SETTLEMENT OF OPTIONS AT NSE

Clearing & Settlement (Derivatives) National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all deals executed on the Derivatives (Futures & Options) segment. NSCCL acts as legal counter-party to all deals on NSE's F&O segment and guarantees settlement. A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all deals executed by Trading Members (TM) on NSE, who clear and settle such deals through them
Premium settlement for option contracts 1. Premium settlement in respect of admitted deals in Options contracts on index and on individual securities is cash settled by debiting / crediting of the clearing accounts of clearing Members with the respective Clearing Bank. 2. 3. Style of premium settlement is premium style. the premium payable or receivable value of clearing members shall be computed after netting the premium payable or receivable positions at Trading member level, for each option contract, at the end of each trading day. Exercise Settlement for Option Contracts Index Options 1. Exercise settlement is effected for positions in option contracts at in the-money strike prices, existing at the close of trading hours, on the last trading day an option contract. Long positions at in the money strike prices shall be assigned to short positions in option contracts with the same series on a random basis.
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2.
Exercise settlement in respect of admitted deals in Index Options Contracts are cash settled by debiting / crediting of the clearing accounts of the relevant clearing Members with the respective Clearing Bank.
3. 4.
Exercise style of index option contracts are of European style. Type of Exercise for index option contracts are Automatic on expiry of the option contract.
5.
Exercise mechanism for index option contracts are Final, on the expiration day of the index options contract, after the close of trading hours.
6.
Index option contracts, which have been exercised, shall be assigned and allocated to clearing Members at the client level.
7.
Open positions, in an index option contracts, shall cease to exist after its expiration day.
Options on individual securities 1. 2. 3. Exercise style of option contracts on individual securities are American style. Option contracts, which have been exercised, shall be assigned and allocated to clearing members, at the client level in accordance with the random method. Open position, in an option contract, shall cease to exist after its expiration day.
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Interim Exercise Settlement 1. Interim exercise settlement shall be effected for exercised option positions at in the money strike prices, at the close of the trading hours, on the day of exercise. Valid exercised option contracts shall be assigned to short positions in option contract with the same series. 2. Exercise settlement may be cash settled or delivery settled, in accordance with SEBI guidelines. Initially option contracts will be cash settled. 3. 4. Type of Exercise for interim Exercise Settlement will be Voluntary. Mode of settlement may be cash settle din the F & O segment or settlement by creation of obligations in the underlying segment, as may be specified by the relevant authority. Initially option contracts will be cash settled in F&O segment, by debiting / crediting of relevant clearing accounts of relevant Clearing Members with the respective clearing Bank towards the Exercise Settlement Value for each unit of the option contract. Final Exercise Settlement 1. Final Exercise settlement shall be effected for option positions at in the money strike prices at the close of the trading hours, on the last trading day of an option contract. Long positions at in the money strike prices shall be assigned to short positions in option contract with the same series. 2. Exercise settlement may be cash settled or delivery settled, in accordance with SEBI guidelines. Initially option contracts will be cash settled. 3. Type of Exercise for Final Exercise settlement will be Automatic, on expiry of the option contract. KLSs Institute Of management Education And Research, Belgaum 30
4. Mode of settlement may be cash settled in the F & O segment or settlement by creation of obligations in the underlying segment, as may be specified by the relevant authority Initially option contracts will be cash settled in F&O segment, by debiting / crediting of relevant clearing accounts of relevant clearing embers with the respective clearing Ban towards the Exercise settlement value for each unit of the option contract.
Non-Fulfillment of settlement obligations Non-fulfillment of either the whole or part of he settlement obligations will be traded as a violations of the Rules, Bye-Laws and Regulations of Clearing Corporation and attracts penal charges @ 0.09% per day of the amount not paid throughout the period of non-payment. In addition and without prejudice to the foregoing, Clearing corporation may, within such time as it may deem fit, advise the Exchange to withdraw any or all of the membership rights of Clearing member including the withdrawal of trading facilities of all Trading Members and or clearing facility of custodial participants clearing through such Clearing Members, without any notice. In addition, the outstanding positions of such Clearing member and / or Trading members and / or constituents, clearing and settling through such clearing member, may be closed out forthwith or any time thereafter by the exchange at the discretion of clearing corporation, to the extent possible, by placing at the Exchange, counter order in respect of the outstanding position of Clearing member without any notice to the clearing member and / or Trading member and or constituent, and such action shall be final and binding on the clearing member and / or Trading member and / or constituent. Clearing Corporation may also initiate such other risk containment measures as it deems fit with respect to the open positions of the clearing member and / or Trading Member and / or constituent. Clearing Corporation may, in additional to the foregoing provisions, take additional measures like, imposing penalties, collecting appropriate deposits, invoking bank guarantees/fixed deposit receipts, realizing money by disposing off the securities and exercising such other risk KLSs Institute Of management Education And Research, Belgaum 31
containment measures as it deems fit and may further take such disciplinary action as it may deem fit and appropriate in this regard. Non-Fulfillment of Base Minimum capital Requirements:Any failure on the part of a clearing member to meet with the Base Minimum Capital requirements at any point of time, will be treated as a violation of the Rules, Bye-Laws and Regulations of caring corporation and clearing corporation may within such time as it may deemed fit, advise the exchange to withdraw any or all of the membership rights of such clearing member including withdrawal of trading facilities of all trading Members and / or clearing facility of custodial participants clearing and settling through such Clearing members without any notice. In addition, the outstanding positions of such learning member and ./ or Trading members and / or constituents, clearing and settling through such clearing member, may be closed out forthwith or any time thereafter by the Exchange, at the discretion of Clearing Corporation, to the extent possible, by placing at the Exchange, counter orders in respect of the outstanding position of such Clearing member without any notice to the clearing member and / or Trading Members and / or constituents, and such actions shall be final and binding on the Clearing Members and / or Trading Members and / or constituents, Clearing Corporation may also initiate such other risk containment measures as it deems fit with respect to the open positions of the clearing member and / or Trading members and / or constituents. Clearing Corporation may, in addition to the foregoing provisions, take additional measures like, imposing penalties, collecting appropriate deposits, involving bank guarantees / fixed deposit receipts, realizing money by disposing off the securities and exercising such other risk containment measures as it deems fit and may further take such disciplinary action as it may deem fit and appropriate in this regard.
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6.THE BLACK AND SCHOLES MODEL

The Black and Scholes option Pricing Model didnt appear overnight, in fact fisher black started out working to crate a valuation model for stock warrants. This work involved calculating a derivative to measure how the discount rate of a warrant varies with time and stock price. The result of this calculation held a striking resemblance to a well-known heat transfer equation. Soon after this discovery, Myron Scholes joined Black and the result of their work is a startlingly accurate option pricing model Black and Scholes cant take all credit for their work, in fact their model is actually an improved version of a previous model developed by A. James Boness in his Ph. D dissertation at the University of Chicago Black and Scholes improvement on the Boness model come in the form of a proof that the risk free interest rate is the correct discount factor, and with the absence of assumptions regarding investors risk preferences. The Model C=S0(d1)-Ee(-rt)N(d2) C= Current value of the option S0=Current Stock price E= Exercise price of the option r =Risk free interest rate t = time reaming before the expiration date (expressed as a fraction of a year) N =Cumulative standard normal distribution e = exponential term (2.7183) d1 = In (S0/E)+(r+s2/2)t s d2 = d1 - s t t
s = standard deviation of stock returns In = natural logarithm In order to understand the model itself, we divide it into two parts. The first part, S0(d1), derives the expected benefit from acquiring a stock outright. This is found by multiplying stock price (S) KLSs Institute Of management Education And Research, Belgaum 33
by the change in the call premium with respect to a change in the underlying stock price (N (d1). The second part of the model, Ee (-rt)N(d2), gives the present value of paying the exercise price on the expiration day. The fair market value of the call option is then calculated by taking the difference between these two parts. ASSUMPTIONS OF THE BLACK AND SCHOLES MODEL 1) The stock pays no dividends during the options life
Most companies pay dividends to their shareholders, so this might seem a serious limitation to the model considering the observation that higher dividend yields elicit lower call premiums. A common way of adjusting the model for this situation is to subtract the discounted value of a future dividend from the stock price. 2) European exercise terms are used European exercise terms dictate that the option can only be exercised on the expiration date. American exercise terms allow the option to be exercised at any time during the life of the option, making American options more valuable due to their greater flexibility. This limitation is not a major concern because very few calls are ever exercised before the last few days of their life. This is true because when one exercise a call early, one forfeit the remaining time value on the call and collect the intrinsic value. Towards the end of the life of a call the remaining time value is very small, but the intrinsic value is the same. 3) Markets are efficient This assumption suggests that people cannot consistently predict the direction of the market or an individual stock. The market operates continuously with share prices following a continues into process. To understand what a continuous ito process is one must first know that a Markov process is one where the observation in time period depends only on the preceding observation. 4) No commissions are charged Usually markets participants do have to pay a commission to buy or sell options even floor traders pay some kind of fee, but it is usually very small. The fees that individual investors pay is more substantial and can often distort the output of the model. KLSs Institute Of management Education And Research, Belgaum 34
5)
Interest rates remain constant and known
the Black and Scholes model uses the risk free rate to represent this constant and know rate. In reality there is no such thing as the risk free rate, but the discount rate on U.S. Government Treasury Bills with 30 days left until maturity is usually used to represent it. During periods of rapidly changing interest rates, these 30 days rates are often subject to change, thereby violating one of the assumptions of the model. 6) Return are log normally distributed This assumption suggests, return on the underlying stock are normally distributed, which is reasonable for most assets that offer options.
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7. Differences between forward, futures and options

Contract Forward Futures Options Future agreement that Future agreement that Future agreement where the obliges the buyer and obliges the buyer and seller is obliged, but the seller Contract Size Depending on seller the Standardized buyer has an option but not an obligation Standardized
transaction and the requirements of the Expiry Date contract parties Depending on transaction the Standardized Standardized style options at exercised American can any be time.
European style options can Transaction method Guarantees Negotiated seller None. only be exercised at expiry. directly Quoted and traded on Quoted and traded on the Exchange must The buyers pay a premium initial to the seller. The seller
by the buyer and the Exchange It is very Both parties an
difficult to undo the deposit
operation profits and guarantee (margin) the deposits an initial guarantee losses are cash settle value of the operation (margin0 with subsequent at expiry is marked to market deposits made depending rates with daily on the market the settlement of profits underlying asset can be Secondary Market and losses. None. It is difficult to Futures quit profit expiry the or loss used as guarantee. exchange Options exchange operation or loss can be
operation operation can be quit can be quit prior to expiry at prior to expiry profit or profit loss can be realize at realized at any time. 36
Institutional Guarantee Settlement
The
any time contracting Clearing House
Clearing House
parties Cash settled
Contracts are usually When a long position is close prior to expiry by exercised it may be settled taking a compensating by delivery or cash settled. position at expiry A long position which is contract can be cash out of the money is usually settled or settled by cancelled prior to expiry. delivery underlying of the
VOLTALITY KLSs Institute Of management Education And Research, Belgaum 37
An essential element determining the level of option prices, volatility is a major of the rate and magnitude of change of prices, i.e. up and down of the underlying asset. If volatility is high, the premium on the option will be relatively high and vice versa. Once you have a major of statistical volatility for any underlying, you can plug the value into the standard option pricing model and calculate the fair market value of an option. A models fair market value however is often out of line with the actual market value for that same option. This is known as option miss pricing. What does this all mean? For this we need to look closer at the implied volatility. The answer can be found in the amount of expected volatility (implied volatility). The market is pricing into the option. Option models calculate implied volatility using statistical volatility and current market prices,. For example, if the price of an option should be 3 points in premium price and the option price today is at 4, the additional premium is attributed to in implied volatility pricing. Implied volatility is determined after plugging in current market prices of option. Usually an average of the two nearest just out of the money option strike prices.
9.Advantages of option trading

KLSs Institute Of management Education And Research, Belgaum 38
Leverage: with the greater leverage the options provide, even small movements in the underlying asset price can yield a high percentage return on your investment. Cushioning of power: If the investor has a six month option, they are not forced out of market, if market is unfavorable. They can wait until a market moves into a profitable position before exercising that option back to the market. Relax: Every investor should know the total potential risk before investing. When purchasing commodity options, you risk only the amount of original investment including commission and fees and nothing more. There is no margin call etc. No matter what happens in the market you can sleep at night knowing your total risk from day one when you enter the agreement.
Besides offering flexibility to the buyer in form of right to buy or sell, the major advantage of options is their versatility. They can be as conservative or as speculative as one's investment strategy dictates. Some of the benefits of Options are as under:
High leverage as by investing small amount of capital (in form of premium), one can take exposure in the underlying asset of much greater value. Pre-known maximum Risk for an option buyer Large profit potential & limited risk for Option buyer One can protect his equity portfolio from a decline in the market by way of buying a protective put wherein one buys puts against an existing stock position This option position can supply the insurance needed to overcome the uncertainty of the marketplace. Hence, by paying a relatively small premium (compared to the market value of the stock), an investor knows that no matter how far the stock drops, it can be sold at the strike price of the Put anytime until the Put expires.
E.g. An investor holding 1 share of TCS at a market price of Rs3800thinks that the stock is overvalued and therefore decides to buy a Put option at a strike price of Rs3800 by paying a premium of Rs200 If the market price of TCS comes down to Rs3000, he can still sell it at Rs3800 by exercising his put option. Thus by paying a premium of Rs200, he insured his position in the underlying stock.
10.DATA ANALYSIS AND FINDINGS:

Q.1) The percentage of male and female respondents interviewed were as follows RESPONDENT MALE FEMALE PERCENTAGE 94% 6%
% of respondents
6%
male female
94%
Q.2) Yes No
Are you aware of options trading? % of Respondents 80% 20%

% of awareness
20%
yes no
80%
Q.3) Are you willing to know about the option trading? KLSs Institute Of management Education And Research, Belgaum 40
Yes No
% of resp.willingness
% of Respondents 80% 20%
20%
yes no
80%
Q.4) Do you need awareness programme on Option trading? Yes No % of respondents 67.5% 32.5%
% of respo.
32.50% Yes No 67.50%
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Q.5) How do you feel about the risk associated by investing in Options? Yes No % of respondents 60% 40%
% of respo.
40% Less risky Moderately risky 60%
Q.6) Would you like to Trade in options? Yes No % of respondents 62.5% 37.5%
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% of resp.
37.50% yes no 62.50%
Q.7) Which of the following would be more effective in creating awareness? Most of the respondents want a workshop to be conducted followed by a seminar.
11.Interpretation and Recommendations
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The analyses of options valuations comparisons were made between premium price prevailing in the market and price found by calculating through Black Scholes Model of Three Pharma companys call options, the calculations and graphs are shown in separate Excel file here with. 1. In Cipla chart the pink line is premium prevailing in market and blue line is valuations through Black scholes model .Here we can observe that variations in graph, i.e. peak and trought are similar with some degree of changes in price. This shows that Black and Scholes model helps in knowing the premium price or ascertaining premium price, it gives birds view of calculating price to the investors and options writer which will help them in quoting premium price 2. In case of Dr.Reddy labs we can observe the graph lines of Black and scholes model and actual price prevailing in market are almost similar, this gives the proof that Black and Scholes model is really useful tool to calculate options valuations. 3. In case of Ranbaxy lab. We observe there is substantial difference in Market price and price calculated through Black and scholes model, here the prices of Ranbaxy lab are volatile and standard deviations is naturally high, so the model which take in to consideration the standard deviation do not show the clear picture and fails to go concurrently with market price, this shows when one parameter is having some substantial change, here the volatility of share, Model gives a different picture. In such cases investors and options writers cannot use this model with accuracy, which is the drawback of this Model Black and Scholes model to greater extent really helps in valuating options and investors should learn to use this model back up with their experience in option trading will give the investor a clear cut idea of what should be the price of premium of options to gain favorable rewards.
Conclusion
1. Option trading is a trading which helps in reducing the risk of investors, where the volatility of shares price are more. 2. Black and Scholes model helps in ascertaining the price of premium of options. 3. As per Data analysis most of the investors do not have much idea of options trading in Belgaum they are required to be given awareness training and knowledge with the help of workshops and seminars ,as investors are willing to know more about option trading.
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What we should know about Options -The Glossary

Some basic terminology Options the right but not the obligation either to buy or sell a specified quantity of the underlying at a fixed exercise price on or before the expiration date. Call options the right to buy a specified quantity of the underlying at a fixed exercise price on or before the expiration date Example: The holder of ABC call option has the right American style Options which may be exercised at any time prior to their expiration. European style Options which may be exercised only on the expiration date. Premium It is the price that the holder of an option pays and the writer of an option receives for the rights conveyed by the option. The premiums are not fixed by the Exchange and are subject to fluctuations in response to market and economic forces. The factors affecting pricing of an option include current value of the underlying, the exercise price, current values of futures on the underlying, style of option, individual opinion and estimates of the future volatility of the underlying, historical volatility of the underlying, the time remaining till expiration, cash dividends payable on the underlying stock, current interest rates.
Opening transaction a purchase or a sale transaction by which a person establishes or increases a position either as the holder or the writer of an option. Closing transaction - a transaction by which a person reduces or cancels out previous position either as the holder or the writer of that option. For example, an investor, at some point prior to expiration, may make an offsetting sale of an identical option, if he is an option holder or make an offsetting purchase of an identical option, if he is an option writer. KLSs Institute Of management Education And Research, Belgaum 46
Long and short Long refers to a position as the holder of an option. Short refers to a position as the writer of an option. At the money means that the current market value of the underlying is the same as the exercise price of that option Example If the current Nifty is 1500, Nifty 1500 call (strike Price is 1500), is at the money. In the money A call option is said to be in the money if the current market value of the underlying is above the exercise price of that option. A put option is said to be in the money if the current market value of the underlying is below the exercise price of the option. Example If the current Nifty is 1500, Nifty 1490 call (strike Price is 1490) and Nifty 1520 put (strike price is 1520) are in the money. Out of the money - A call option is said to be out of the money if the current market value of the underlying is below the exercise price of that option. A put option is said to be out of the money if the current market value of the underlying is above the exercise price of that option. Example If the current Nifty is 1500, Nifty 1520 call (strike Price is 1520) and Nifty 1490 put (strike price is 1490) are out of the money. Intrinsic value and time value The premium of the option may be assumed to consist of two components intrinsic value and time value. Intrinsic value reflects the amount, if any, by which an option is in the money. Time value is the premium of the option, Example: If the current Nifty is 1500, Nifty 1490 call (strike price is 1490) trading at a premium of Rs.50 reflects an intrinsic value of Rs.10 and time value of Rs.40 per Nifty.
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APPENDIX
Top 5 most active Options contracts:
Sr. No. 1 2 3 4 5 Contract Descriptor
NIFTY FEBRUARY 2006 CE 3000 NIFTY FEBRUARY 2006 PE 3000 NIFTY FEBRUARY 2006 PE 2950 NIFTY FEBRUARY 2006 CE 3050 NIFTY FEBRUARY 2006 CE 2950
No. Of Contracts 177,788 153,809 103,992 92,466 71,577 868,737 1,468,369
Traded Value (Rs. In crs) 5,411 4,681 3,105 2,840 2,161 29,401 47,599
Percentage of Contracts to Total contracts 12.11 10.47 7.08 6.30 4.87 59.16 100.00
OTHERS TOTAL
. QUESTIONNAIRE KLSs Institute Of management Education And Research, Belgaum 48
1. Name:
_______________________________________
2. Address: _______________________________________ _______________________________________ 3. Telephone No. Office: ______________ Mobile No: _______________ 4. Gender: Male Female Residence: _____________________
5 Are you aware of Option Trading? Yes No
If No Go to Next Question. If Yes Go to Q. No.9 6 Are you willing to know about Option Trading? Yes No
7. Do you need awareness programme on option trading? Yes No
8. If Yes Continue Which of the following would be more effective in creating awareness? Seminar Workshop Any other 9. How do you feel about the risk associated by investing in Options? Very Risky Risky Moderately Risky less Risky 10. Would you like to Trade in options? Yes No
THANK YOU
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BIBLIOGRAPHY
BOOKS 1. Donald S Tull and Del Hawkins-Marketing Research 2. Punitavathy Pandian- Security Analysis and Portfolio Management 3. .N D Vohra and B R Bagri-Futures and options WEBSITES 1. www.indiainfoline.com 2. www.myiris.com 3. www.nseindia.com
Company Profile KLSs Institute Of management Education And Research, Belgaum 50
JRG Securities Ltd is one of India's leading financial services providers with strong presence in South India. The company along with their subsidiaries is primarily engaged in the business of retail broking (equity and commodity broking), direct insurance agent and financial services. Their product suite includes equity trading, commodity trading, currency derivatives, insurance broking, margin financing and loans against shares, among others. They offer an online product, through a brand, Inditrade, to offer services to the online customers. The company is a member of the National Stock Exchange of India (NSE), the Bombay Stock Exchange (BSE), the National Multi Commodity Exchange of India Ltd (NMCEIL), the National Commodities Derivatives Exchange Ltd (NCDEX), the Multi Commodity Exchange of India Ltd (MCX) and the Indian Pepper and Spices Trades Association (IPSTA). They are a full-fledged depository participant of the National Securities Depository Ltd and Central Depository Services (India) Ltd. Besides these, they are also a leading Insurance Broker. The company is 44.8%-owned by Duckworth Ltd, a subsidiary of Baring India Pvt Equity Fund II Ltd. The company is headquartered in Kochi with a physical presence of about 475 branches and associates across Kerala, Tamil Nadu, Andhra Pradesh, Karnataka and Maharashtra. The company is listed on the Bombay Stock Exchange and has a diverse set of public shareholders. JRG Securities Ltd was incorporated on October 17, 1994 as a private limited company with the name JRG Associates Pvt Ltd. Initially, the company was started as a partnership firm in the year 1992, and later converted into a private limited company. In the year 1994, they became a member of the Cohin Stock Exchange. They initially focused on developing a client base in Kerala and Tamil Nadu and established several operation centres across these states. In the year 1999, the company became a member of the NSE and also a member of Inter Connected Stock Exchange Ltd. In the year 2000, the company became Depository Participant of The National Securities Depository Ltd. Also, they became a Sub-Broker of Bombay Stock Exchange. In the year 2002, they established a branch in Bangalore and in the year 2003, they established a branch at Chennai. In August 26, 2003, the name of the company was changed from JRG Associates Pvt Ltd to JRG Securities Pvt Ltd. In September 2003, the company was converted into public limited company and the name was changed to JRG Securities Ltd. In the year 2005, the company became a member of The Bombay Stock Exchange Ltd. Also, they started operations in Maharashtra, Uttar Pradesh, Andhra Pradesh, Delhi and Punjab. During the year 2005-06, the company introduced Mobile trading (M-Trade) & Internet trading (I-Trade) in the Market. In November 5, 2005, the company formed a wholly owned subsidiary company in Dubai, namely JRG Metals & Commodities DMCC. During the year 2006-07, the company formed a joint venture company with Keynote Capitals Ltd by the name, Arteries Investor Services Ltd which deals with providing customized financial solutions to the clients. In November 2006, the company formed a subsidiary company namely Commodity Online (India) Ltd for providing online services related to commodities such as news updates, analysis and premium research reports on commodities. Also, they set up an exclusive web portal with name www.commodityonline.com for this purpose. During the year, the company launched futures trading in Indian rupee contracts in the Dubai Gold and Commodity Exchange (DGCX), through JRG Metals & Commodities DMCC. The company received the licence to incorporate a joint venture company in Saudi Arabia by name JRG Al Fahhad International Financial Services Ltd with the local partner, United International Trading Company Ltd. in Saudi Arabia. In the year 2007, the Baring India Private Equity Fund II Ltd, a leading private equity firm of international repute acquired a majority stake in the company. In September 2007, the company incorporated subsidiary company, namely JRG FinCorp Ltd, which is a Non Banking Financial Company. During the year 2008-09, the insurance brokerage division commissioned a service centre to provide end-to-end customer service from customer introduction to policy renewal and queries. In August 2008, the company established a 100% subsidiary, namely JRG Business Investment Consultants Ltd to undertake the business of investment advisory services, financial portfolio management and marketing and distribution of financial products. During the year 2009-10, the company launched new business products in currency and commodity trading and demonstrated exceptional success in building these retail businesses. In the equity brokerage division, they opened 21 branches in multiple locations and launched the internet trading brand, Inditrade, with 'Empowering the investor in you' tagline for enhanced trading convenience. In the commodity brokerage division, they set up a centralized desk with a toll-free number that services customers and associates till midnight. In April 15, 2010, the company launched a new online offering inditrade.com, which empowers customers to trade online and invest in the whole gamut of the company's products - equities, commodities, currencies, mutual funds and insurance.
51
Profit & Loss
Particulars INCOME : Operating Income Other Income Total Income EXPENDITURE : Operating & Administration Expenses Miscellaneous Expenses Interest Less: Pre-operative Expenses Capitalised Employee Expense Total Expenditure Gross Profit Depreciation Profit Before Tax Tax Fringe Benefit tax Deferred Tax Reported Net Profit Extraordinary Items Adjusted Net Profit Adjustment below net profit P & L Balance brought forward Appropriations P & L Balance carried down Dividend Preference Dividend
Mar-12
24.69 1.46 26.15 15.94 3.34 1.20 0.00 9.33 29.81 -3.66 5.58 -9.24 0.00 0.00 0.00 -9.24 -1.18 -8.06 0.00 0.71 0.00 -8.53 0.00 0.00
Mar-11
37.07 1.62 38.69 21.46 2.36 0.51 0.00 13.83 38.16 0.53 6.06 -5.53 0.00 0.00 -0.42 -5.11 0.00 -5.11 0.00 5.82 0.00 0.71 0.00 0.00
Mar-10
47.97 0.03 48.00 25.48 0.86 1.01 0.00 11.50 38.85 9.15 6.55 2.60 1.39 0.00 -0.25 1.46 -0.01 1.47 0.00 4.36 0.00 5.82 0.00 0.00
Mar-09
39.86 0.51 40.37 23.14 3.82 1.04 0.00 10.24 38.24 2.13 3.94 -1.81 -0.31 0.06 -0.46 -1.10 -0.11 -0.99 0.00 5.46 0.00 4.36 0.00 0.00
Mar-08
53.11 0.17 53.28 32.08 2.54 0.83 0.00 8.31 43.76 9.52 1.30 8.22 2.28 0.18 0.49 5.27 0.00 5.27 0.00 2.23 2.04 5.46 1.74 0.00
Mar-07
27.23 0.00 27.23 15.71 0.59 0.40 0.00 3.96 20.66 6.57 0.57 6.00 1.63 0.06 0.35 3.96 0.00 3.96 0.00 0.71 2.44 2.23 1.92 0.00
52
Equity Dividend % Earnings Per Share-Unit Curr Earnings Per Share(Adj)-Unit Curr Book Value-Unit Curr
0.00 0.00 0.00 31.27
0.00 0.00 0.00 35.17
0.00 0.63 0.63 37.19
0.00 0.00 0.00 33.46
7.50 2.15 2.15 34.17
15.00 2.85 2.85 20.41
Balance Sheet
(Rs. in Crores)
Standalone | Consolidated Particulars SOURCES OF FUNDS : Share Capital Reserves Total Total Shareholders Funds Secured Loans Unsecured Loans Total Loan Funds Total Liabilities APPLICATION OF FUNDS : Loan / Non-Current Assets Fixed Assets Gross Block Less: Accumulated Depreciation Less:Impairment of Assets Net Block Lease Adjustment Capital Work in Progress Investments Current Assets,Loans & Advances Inventories Sundry Debtors Cash and Bank Balance Loans and Advances Total Current Assets Less: Current Liab. & Provisions Mar-12
23.29 49.54 72.83 5.60 6.39 11.99 84.82 0.00 31.37 23.56 0.00 7.81 0.00 0.03 36.69 0.00 5.97 28.59 11.65 46.21
Mar-11
23.29 58.61 81.90 0.00 0.00 0.00 81.90 0.00 31.53 18.24 0.00 13.29 0.00 0.00 37.19 0.00 6.92 32.79 11.55 51.26
Mar-10
23.28 63.30 86.58 0.00 0.00 0.00 86.58 0.00 32.96 15.11 0.00 17.85 0.00 0.37 42.20 0.00 17.86 31.94 17.39 67.19
Mar-09
23.17 54.36 77.53 0.00 0.00 0.00 77.53 0.00 26.50 8.64 0.00 17.86 0.00 0.05 41.43 0.00 11.81 31.44 20.57 63.82
Mar-08
23.17 56.00 79.17 0.00 0.00 0.00 79.17 0.00 18.34 4.23 0.00 14.11 0.00 2.64 40.87 0.00 18.96 42.01 16.29 77.26
Mar-07
12.79 13.31 26.10 0.00 0.00 0.00 26.10 0.00 9.95 2.93 0.00 7.02 0.00 0.00 3.84 0.00 13.39 19.02 8.64 41.05
53
Current Liabilities Provisions Total Current Liabilites & Provisions Net Current Assets Miscellaneous Expenses not written off Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Total Assets Contingent Liability
13.76 0.00 13.76 32.45 0.00 0.00 0.00 0.00 76.98 26.51
28.91 0.00 28.91 22.35 0.00 0.00 0.00 0.00 72.83 39.31
40.45 0.16 40.61 26.58 0.00 0.57 0.99 -0.42 86.58 41.09
37.67 0.09 37.76 26.06 0.00 0.74 1.41 -0.67 84.73 20.54
45.76 2.22 47.98 29.28 0.88 0.00 1.41 -1.41 86.37 60.91
22.20 3.87 26.07 14.98 1.18 0.00 0.92 -0.92 26.10 23.00
Daily Share Prices

BSE | NSE Date
29-may-13 28-may-13 24-may-13 23-may-13 22-may-13 21-may-13 20-may-13 17-may-13 16-may-13 15-may-13 14-may-13 13-may-13 10-may-13 09-may-13 08-may-13 07-may-13 03-may-13 02-may-13 30-apr-13
Open Price
7.33 7.70 8.00 8.00 7.52 8.00 8.03 8.99 8.01 8.11 9.20 8.00 8.00 8.79 8.10 9.00 8.06 8.11 8.85
High Price
8.00 8.20 8.09 8.00 8.52 8.00 8.03 8.99 8.01 8.11 9.20 9.00 9.10 9.00 8.10 9.00 8.90 8.12 8.85
Low Price
7.33 7.70 8.00 8.00 7.52 8.00 8.03 8.01 7.90 8.00 9.20 8.00 8.00 8.79 8.10 8.01 8.06 8.11 8.85
Close Price
8.00 8.20 8.00 8.00 8.52 8.00 8.03 8.01 8.00 8.10 9.20 8.30 9.10 9.00 8.10 8.01 8.90 8.12 8.85
Total Volume
1,800 1,475 1,550 10 72 1,200 10 800 2,450 1,781 20 40 350 3,101 850 5,627 490 1,200 200
No of Trades
10 9 8 1 2 4 1 7 11 4 1 3 3 10 4 12 5 3 1
Turnover in(Rs.in Lakh)

0.14 0.12 0.12 0.00 0.01 0.10 0.00 0.07 0.20 0.14 0.00 0.00 0.03 0.28 0.07 0.48 0.04 0.10 0.02
Monthly Share Prices

Year High(Rs.)
9.60 9.10 10.78 11.80 12.80
Low(Rs.)
6.99 7.00 8.52 9.60 10.86
Close(Rs.)
8.85 7.70 8.52 9.80 11.00
P/E High
0.00 0.00 0.00 0.00 0.00
P/E Low
0.00 0.00 0.00 0.00 0.00
P/E Close
0.00 0.00 0.00 0.00 0.00
Mkt Cap. (Rs. in Cr.)

20.66 17.98 19.89 22.88 25.69
Apr-13 Mar-13 Feb-13 Jan-13 Dec-12
Share Prices Of 2012
54
Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 Jan-12 Dec-11 Nov-11 Oct-11 Sep-11 Aug-11 Jul-11 Jun-11 May-11 Apr-11 Mar-11 Feb-11 Jan-11 Dec-10 Nov-10 Oct-10 Sep-10 Aug-10 Jul-10 Jun-10 May-10 Apr-10 Mar-10 Feb-10 Jan-10
13.89 16.65 15.92 11.90 10.90 10.80 13.65 16.40 20.90 22.05 18.50 14.20 17.80 18.85 21.00 22.75 24.70 25.65 27.90 27.95 27.90 29.40 38.00 36.00 37.40 40.95 37.65 37.95 37.25 36.90 40.00 42.00 43.00 41.75 50.00
11.41 13.15 9.33 9.10 9.05 9.20 10.01 12.20 14.30 16.00 12.10 11.75 12.00 15.65 16.15 15.55 20.50 21.10 20.65 24.40 22.10 22.60 26.00 31.20 31.00 32.80 31.30 31.05 28.55 31.00 33.20 37.05 34.60 37.00 39.70
12.50 13.20 15.06 10.15 10.24 10.18 10.26 13.00 15.80 20.70 16.49 12.25 13.00 17.00 17.95 17.80 21.10 23.05 23.10 26.55 25.05 25.10 27.15 32.25 33.00 33.45 34.55 32.30 32.60 33.80 35.00 38.95 40.60 39.05 40.20
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 50.95 70.90 57.50 61.89 68.30 62.37 69.85 61.69 64.04 72.15 70.25 71.22 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 32.91 39.55 47.36 46.33 51.09 45.91 47.93 36.97 44.15 49.92 56.89 50.27 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 39.87 43.13 51.22 52.42 53.14 54.88 51.31 51.78 53.57 55.48 61.73 64.35 0.00 0.00
29.19 30.82 35.17 23.70 23.91 23.77 23.96 30.36 36.89 48.33 38.50 28.60 30.36 39.70 41.91 41.56 49.27 53.82 53.94 61.99 58.49 58.61 63.40 75.30 77.06 78.11 80.67 75.42 76.12 78.75 81.55 90.75 94.60 90.99 93.67
55
Key Executives
Chairman Director Director Director Rahul Bhasin Munish Dayal B R Menon Pradeep Mallick
Board Of Directors
Chairman Director Company Secretary Managing Director &Addtnl Dir. Rahul Bhasin Munish Dayal B R Menon Pradeep Mallick P Viswanathan Harjit Singh Sidhu Gopichand S
Products & Services

Product Name
Income from Stock Broking Interest Other Operating Income Dividends Service Income Profit on sale of investment
Uni t
Rs. Rs. Rs. Rs. Rs. Rs.
% of Stock
84.1 11.5 4.2 0.1 0.0 0.0
% Cap. Util.
0.0 0.0 0.0 0.0 0.0 0.0
Inst. Prod. Prodn Cap

0 0 0 0 0 0 0 0 0 0 0 0
Sales Qty
0 0 0 0 0 0
Sales (Cr.)
20.77 2.85 1.04 0.03 0.00 0.00
Sales (Rs.) / Unit

-
56
RG Securities Ltd is a premier brokerage house in India on the fast growth track. In the last one decade, they have emerged as a powerhouse in the financial services industry. They started functioning in the stock market in 1992. Over the years, they grew from strength to strength to become a major player in Indias broking services sector. JRG is one of the foremost brokerage houses, being a member of various exchanges in the capital and commodity markets and the insurance sector. JRG is a member of the National Stock Exchange of India (NSE), the Bombay Stock Exchange, the National Multi Commodity Exchange of India Ltd (NMCEIL), the National Commodities Derivatives Exchange Ltd (NCDEX), the Multi Commodity Exchange of India Ltd (MCX) and the Indian Pepper and Spices Trades Association (IPSTA). JRG is a full-fledged depository participant of the National Securities Depository Ltd and Central Depository Services (India) Limited. JRG is also one of southern Indias leading Insurance Brokers. No wonder, they call themselves, the Financial Supermarket. JRG constantly infuses quality into service. They provide their clients full expertise to play in the market with confidence. They avail full-fledged trading facilities and services through our nation-wide offices in securities and in commodities. To help their clients better, they have located their offices in major towns and placed highly qualified and experienced financial experts to man them. A team of dynamic finance professionals with decades of experience leads them. These professionals share a common vision not only to transform the company into a highly professional organization, but also make their clients earn the maximum from their hard-earned money. Their transparency, commitment and integrity in all dealings have earned them trust, which in turn has enabled us to build long term relationships. JRG Group of Companies:
JRG Wealth Management Ltd JRG Insurance Broking Pvt Ltd JRG Metal & Commodities DMCC,Dubai JRG Fincorp Limited JRG Business Investment Consultants Limited
Services offered by the company:
Equities Commodities Insurance Mutual Funds I -Trade IPOs Loan
57
S.No 1 3 2 4 5 6 7
Name Rahul Bhasin Gopichand S Harjit Singh Sidhu Munish Dayal P Viswanathan Pradeep Mallick B R Menon
Designation Chairman Managing Director Company Secretary Non Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director
58

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A Project report On OPTIONS TRADING

Internal Guide Prof: R. R. Gondkar

KLSs Institute Of management Education And Research, Belgaum

KARNATAK LAW SOCIETYS INSTITUTE OF MANAGEMENT EDUCATION AND RESEARCH. BELGAUM.

UNDER THE GUIDANCE OF

Mr. GIRISH SARAF

KLSs Institute Of management Education And Research, Belgaum

KARNATAK LAW SOCIETYS INSTITUTE OF MANAGEMENT EDUCATION AND RESEARCH, BELGAUM.

GUIDE (Prof.R.R.Gondkar) Charanthimath)

DIRECTOR (Dr. Poornima.M.

KLSs Institute Of management Education And Research, Belgaum

DECLARATION I. Priyadarshan D. Desai hereby declare that work on project entitled

PLACE: BELGAUM DATE: 04/04/ 06

PRIYADARSHAN D.DESAI REG NO: MBA04003014

KLSs Institute Of management Education And Research, Belgaum

Date: 03-04-2006 Place: Belgaum PRIYADARSHAN D.DESAI

KLSs Institute Of management Education And Research, Belgaum

Title of the project:

KLSs Institute Of management Education And Research, Belgaum

Sr.No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

KLSs Institute Of management Education And Research, Belgaum

KLSs Institute Of management Education And Research, Belgaum

KLSs Institute Of management Education And Research, Belgaum

Chicago Board of Trade

Chicago Board Options Exchange(CBOE)

The Emergence of Put trading

KLSs Institute Of management Education And Research, Belgaum

Employee Stock Options

KLSs Institute Of management Education And Research, Belgaum

Exchange Traded Options

KLSs Institute Of management Education And Research, Belgaum

KLSs Institute Of management Education And Research, Belgaum

KLSs Institute Of management Education And Research, Belgaum

KLSs Institute Of management Education And Research, Belgaum

KLSs Institute Of management Education And Research, Belgaum

KLSs Institute Of management Education And Research, Belgaum

KLSs Institute Of management Education And Research, Belgaum

5.SETTLEMENT OF OPTIONS AT NSE

KLSs Institute Of management Education And Research, Belgaum

KLSs Institute Of management Education And Research, Belgaum

KLSs Institute Of management Education And Research, Belgaum

6.THE BLACK AND SCHOLES MODEL

Interest rates remain constant and known

KLSs Institute Of management Education And Research, Belgaum

7. Differences between forward, futures and options

by the buyer and the Exchange It is very Both parties an

difficult to undo the deposit

KLSs Institute Of management Education And Research, Belgaum

Institutional Guarantee Settlement

any time contracting Clearing House

parties Cash settled

VOLTALITY KLSs Institute Of management Education And Research, Belgaum 37

9.Advantages of option trading

10.DATA ANALYSIS AND FINDINGS:

Are you aware of options trading? % of Respondents 80% 20%

% of Respondents 80% 20%

32.50% Yes No 67.50%

KLSs Institute Of management Education And Research, Belgaum

40% Less risky Moderately risky 60%

KLSs Institute Of management Education And Research, Belgaum

37.50% yes no 62.50%

11.Interpretation and Recommendations

KLSs Institute Of management Education And Research, Belgaum