A Study on Optimizing Risk and Return through Options Trading Strategies

Asifulla A.¹, H. Mahaboob Basha²

¹Assistant Professor, Institute of Management Studies, Davanagere University, Davanagere, Karnataka.

²Assistant Professor and Research Scholar, Government First Grade College,

Harapanahalli (T) Ballari (Dist) Karnataka.

*Corresponding Author E-mail: asifattar4@gmail.com, profbasha.gfgc@gmail.com

ABSTRACT:

Options offer elective systems for financial specialists to benefit from trading underlying securities. There are assortments of methodologies including diverse blends of options, underlying assets, and other derivatives. Fundamental Strategies includes purchasing calls, purchasing puts, selling covered calls and purchasing protective puts. There are points of interest to trading choices instead of underlying assets, for example, downside protection and leveraged returns, however there are additionally burdens like the necessity for upfront premium payment. Here in the report an endeavor is to make to build up the methodologies dispensing with those disadvantages through direct of nitty gritty investigation on Nifty Index. The premium expenses being pursued to be the major influencing factor of options market, an attempt is made to optimize the risk and return by developing the effective trading strategies for the option traders irrespective of market conditions with special reference to NIFTY Index. As a part of study suggestions are drawn for the investors to improve their trading strategies without undertaking great deal of risk. This paper analyses the use of different option trading strategies for optimizing risk and return in both bullish and bearish markets. A study on optimizing risk and return through developing effective index options trading strategies is an attempt to apply the theoretical knowledge’s application and exposure to practical world of derivative market.

KEYWORDS: Options trading strategies, NIFTY Index, Call Option and Put Option.

INTRODUCTION:

It is a financial market where financial instruments like options, futures, forward contracts and Swaps are traded which are derived from the underlying assets. The derivatives market can be divided into two. One for Exchange-traded Derivatives and other for Over-the-counter Derivatives. Derivative is a financial contract with a value that is derived from an underlying asset. Derivatives have no direct value in and of themselves - their value is based on the expected future price movements of their underlying asset.

On the other hand options are important derivative securities trading all over the world for the last three decades. They are speculative financial instruments. It has peculiar quality under which the holder of the option has been given right to buy or sell an underlying asset at a specified period for a fixed premium. Option trading strategies are used by speculators, hedgers and arbitrageurs. Options can be used to create portfolio with unique features, capable of achieving investment objectives. This paper focus on the different mechanisms used for the design, development and implementation of innovative financial instruments with special reference to option trading strategies. Since the Chicago Board Options Exchange was formed in 1973 and two of the first financial engineers, Fischer Black and Myron Scholes, published their option pricing model, trading in options and other derivatives has grown dramatically. This paper analyses the use of different option trading strategies managing risk and return in both bullish and bearish markets.

OBJECTIVES:

· To learn about Indian derivative market.

· To assess risk and return management tools and to optimize returns to option traders by developing effective options trading strategies with special reference to NIFTY Index.

· To compare the effectiveness of selected option trading strategies for NIFTY index options for a selected period of time.

· To suggest the suitable and effective option trading strategies.

RESEARCH METHODOLOGY:

Research Design: A descriptive research design is adopted for the study as it involves elaborative analysis with characteristics and most important of all calculation of risk and return to the options traders under each trading strategy.

Sample Period: From 01-01-2019 to 31-01-2019.

Sample Scope: Covers only Derivative Market.

Sampling Technique: Purposive sampling which is Non-probability Sampling is adopted for the study. The study concentrates only on NIFTY INDEX as Sample.

Sample Size: NIFTY INDEX.

Statistical Tools: Basic mathematical tools such as addition, subtractions, etc are used for the purpose of analysis.

LITERATURE REVIEW:

G.C. Nath in the year 2003, studied using 20 stocks found out that the instability descends in the post subsidiary period while for just couple of stocks in the example the instability in the post subordinates stays same or increments hardly.

Pok and Poshakwale (2004) Study the effect of the prospects exchanging on spot showcase instability. They utilized information from both the fundamental and non-basic loads of Malaysian securities exchange. The hidden stocks react more to later news though the non-basic stocks react to old news.

Mallikarjunappa and Afsal, in the year 2008 studied the effect of subsidiaries on securities exchange unpredictability utilizing a wide based record. The post-subsidiaries period has demonstrated that the affectability of the file comes back to showcase returns furthermore, anytime impacts have vanished.

Bansal in the year 2009 He has discovered that subsidiaries exchanging has decreased the unpredictability of the Indian securities exchange.

Singh and Saloni in the year 2010 analyzed the effect of monetary subordinates exchanging on the instability of Indian securities exchange utilizing Standard Deviation as a proportion of instability.

Ajay and Koustubh in the year 2010 analyzed the impact of the presentation of subsidiaries on the unpredictability of the Indian stock trade. They have discovered that there has been an adjustment in structure of instability after usage of subsidiaries and instability endures for long in post subordinates period when contrasted with pre subordinates period.

Gurpreet in the examined the unpredictability in the Indian securities exchange after the presentation of fates and choice contracts. The investigation has inferred that the subsidiaries exchanging has upgraded the productivity of the share trading system by lessening the spot showcase instability and by upgrading the liquidity.

Suhasini in the year 2012 hypothetically inspected the effect of record prospects on unpredictability and commotion exchanging. She has examined differentiating hypothetical methodologies and experimental proof identifying with the issue. The paper has reasoned that the issue stays uncertain, regardless of the numerous long stretches of research that have gone into exploring the effect of file prospects.

Debashis (2008) considered the impact of future exchanging on unpredictability and working productivity of the fundamental Indian securities exchange by utilizing matched example measurement what's more, found that presentation of Nifty Index Future exchanging India is related with both decrease in spot value unpredictability and diminished exchanging proficiency in hidden securities exchange.

Debashis did another investigation in the same year to investigate the impact of future exchanging movement on the hop instability of securities exchange by taking instance of NSE Nifty stock record. He utilized multivariate Granger causality demonstrating system and found that future exchanging is not drive behind scenes of hop instability.

Samanta and Samanta (2007) they discovered blended outcome in spot showcase unpredictability if there should arise anoccurrence of 10 singular stocks.

Vipul in the year 2007 explored the adjustment in instability in Indian Stock market after presentation of subsidiaries by utilizing outrageous esteem proportion of unpredictability. The outcome demonstrates that there is decrease in unpredictability of basic offer after presentation of subordinates owing to a diminished determination in earlier day's instability. Be that as it may, Nifty shows conflicting example of increment in its unequivocal GARCH instability and diligence.

Shalini and Duraipandian (2014), examined the utilization of various alternative exchanging systems as a compelling instrument in Financial Engineering which are utilized as a viable device for overseeing hazard in both bullish and bearish markets.

Stephanos in his research paper explained the issue with this model to be utilized for choice exchanging isn't doable as the alternative contracts lapses and there is no congruity of important information purposes of over a month.

Cheol-Ho Park and Scott talk about different kinds of ways out on the trades.It demonstrates how Stop loss, target benefits and trailing ways out can be utilized in exchanging frameworks and its motivation. In any exchanging framework, leave point is similarly vital as section purpose of a exchange. Holding of a bogus exchange for long may increment the misfortunes in framework while leaving an exchange early may lessen the benefit of the exchanging strategy. It is discovered that these ways out can improve the execution of exchanging framework.

Taylor, S. J. demonstrates how channel around affecting normal can be utilized to quit taking exchanges loud development in the market. Thought is to shape an envelope above and beneath moving normal of stock cost and take long position just if value moves above upper channel. The other way around, take seller position if the ascent of stock is underneath lower band. This exchanging technique makes a difference to diminish number of false exchanges the framework.

Merton in the year 1995 sees that the put arrangements have a similar impact as an interest – rate adjustment approach in which the administration re-purchases bonds when bond costs fall and sells bonds when bond costs rise and also writes that the put bonds work as what could be compared to a dynamic, open advertise, exchanging activity with no requirement for real exchanges.

Kane and Markus in the year 1999 center around resource allotment immense what's more, addresses a board set of issues. Most Studies that consider subordinates with regards to resource distribution use alternative – estimating techniques to measure the financial estimation of the market – timing aptitudes.

The Maximum returns and losses in each case can be summarized as follows

Date	Closing Price	Sl. No	Name of the Strategy	Return	Loss
01-Jan-19	10910.1	1.	Long Call	59.85	-174.65
02-Jan-19	10792.5	2.	Short Call	174.65	-59.85
03-Jan-19	10672.25	3.	Synthetic Long Call	-	-302
04-Jan-19	10727.35	4.	Long Put	48.2	-150
07-Jan-19	10771.8	5.	Short Put	150	-48.2
08-Jan-19	10802.15	6.	Covered Call	200	-
09-Jan-19	10855.15	7.	Long Combo	181.85	-78.2
10-Jan-19	10821.6	8.	Protective Call	68.2	-130
11-Jan-19	10794.95	9.	Covered Put	200	-61.85
14-Jan-19	10737.6	10.	Long Straddle	31.85	-167.6
15-Jan-19	10886.8	11.	Short Straddle	167.6	-31.85
16-Jan-19	10890.3	12.	Long Strangle	51.85	-110
17-Jan-19	10905.2	13.	Short Strangle	110	-51.85
18-Jan-19	10906.95	14.	Collar	70	-30
21-Jan-19	10961.85	15.	Bull Call Spread Strategy	75	-125
22-Jan-19	10922.75	16.	Bull Put Spread Strategy	60	-40
23-Jan-19	10831.5	17.	Bear Call Spread Strategy	70	-30
24-Jan-19	10849.8	18.	Bear Put Spread Strategy	30	-70
25-Jan-19	10780.55	19.	Long Call Butterfly	77.6	-10
28-Jan-19	10661.55	20.	Short Call Butterfly	10	-77.6
29-Jan-19	10652.2	21.	Long Call Condor	60	-40
30-Jan-19	10651.8	22.	Short Call Condor	40	-60

FINDINGS:

· Options are considered to be risky due involvement of upfront payment of premium.

· Strategies and position taking for options (either Call or Put) is based on appetite of investors.

· Trader (whether to long or short position) who pays premium acquires right excise the right; one receives the premium is under the obligation to perform if the other party holding right wishes exercises the contract.

· Long Call, short call, long put and short put basically explains the risk and returns involved in any position taken options trading.

· Long call, synthetic long call, long put, long straddle, long strangle and collar strategies yield unlimited returns with limited risk.

· Short calls, covered put, short straddle and short strangle strategies yield limited returns and are exposed to unlimited Risk.

· Long combo is one such strategy which earns unlimited rewards and is associated with unlimited risk.

· Other strategies which earns with limited returns with limited risk exposures.

· Investors take long and short positions on options based on their expectations about the market in the near future. The stock broking firms play a major role in forming such expectations.

· Maximum returns are can be seen in the case of covered call i.e., Rs. 200; and maximum losses are made in the case of synthetic long call i.e., Rs. 302.

SUGGESTIONS:

· Beginners to options market are suggested to work on first basic strategies to understand the payoff patterns in both call and put by taking long as well as short positions based on their expectations about the market.

· Long call, synthetic long call, long put, long straddle, long strangle and collar strategies are the ones which are for those who are of desire have a ownership of assets and wants to safeguard themselves with limited risk exposures.

· Other strategies are considered to be the best for those who want to have a regular income with limited returns having limited risk exposures.

· Investors who want to make unlimited returns and are ready to expose themselves to unlimited risk are suggested to go for long combo strategy.

· Adopting diversified investment to avoid the risk of concentration of money on a single or fewer assets.

· Each strategy serves as a financial product to the investor based on his needs and expectations considering risk taking capability.

CONCLUSION:

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Received on 18.11.2022 Modified on 14.12.2022

Asian Journal of Management. 2023;14(1):11-14.

DOI: 10.52711/2321-5763.2023.00003