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Derivative is a contract whose value is depends on or derived from the

value of underlying assets.


Options give the buyer (holder) a right but not an obligation to buy or sell an asset in future.

Two types of Options, Call Option and Put Option.

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Long Asset.

P R O F I T

LONG NIFTY PAYOFF

5900

6000

6100

L O S S

NIFETY

P R O F I T

SHORT NIFTY PAYOFF

5900

6000

6100 NIFETY

Short Asset.

L O S S

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LONG CALL PAYOFF


P R O F I T

long call.

5700

5800

5900

6000

6100

6200

6300

L O S S
P R O F I T
5700

LONG PUT PAYOFF

5800

5900

6000

6100

6200

6300

long put.
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INDEX OPEN - 5900

L O S S

Short Call.

P R O F I T

SHORT CALL PAYOFF

5700

5800

5900

6000

6100

6200

6300

L O S S
P R O F I T

SHORT PUT PAYOFF

5700

Short Put.
L O S S

5800

5900 600 0

6100 6200

6300

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What are the various types of strategies? Which strategies are more risky? How do we implement different strategies? How do we get payoff in different strategies?

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To know about various derivative contracts. To know option contracts broadly. To understand how options are traded in NSE. To understand different option strategies and its implications. To understand how investors use different strategies to hedge their risk.

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Research Design:

Exploratory Research.

Data Collection Method:

Secondary Data.

Data Source:

Different websites and the Bible of Option strategies(book).

Sample Size:

Four categories of strategies.

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Bullish strategies:

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Bull call spread:


Maximum risk [net debit paid] Maximum reward [difference in strikes - net debit]

Bull put spread:


Maximum risk [difference in strikes _ net credit] Maximum reward [net credit received]

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Covered call:
Maximum risk [stock price paid _ call premium] Maximum reward [call strike _ stock price paid] _ call premium

Collar:
Maximum risk [stock price _ put premium] _ [put strike _ call premium]. Maximum reward [call strike _ put strike _ the risk of the trade]

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Bear put spread:


Maximum risk [net debit paid] Maximum reward [difference in strikes _ net debit]

Bear call strategy:


Maximum risk [difference in strikes _ net credit] Maximum reward [net credit received]

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Covered put:
Maximum risk uncapped Maximum reward [shorted stock price _ strike price] _ put premium

Reverse collar or fence:


Maximum risk: capped. Maximum reward: capped.

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Long straddle:
Maximum risk [net debit paid] Maximum reward [uncapped]

Long strangle:
Maximum risk [net debit paid] Maximum reward [uncapped]

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Strap:
Maximum risk [net debit paid] Maximum reward [uncapped]

Strip:
Maximum risk [net debit paid] Maximum reward [uncapped]

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Long butterfly:
Maximum risk [difference in adjacent strikes _ net credit] Maximum reward [net credit received]

Long iron condor:


Maximum risk [difference in adjacent strikes _ net credit] Maximum reward [net credit received]

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Short straddle:
Maximum risk [uncapped] Maximum reward [net credit received]

Short strangle:
Maximum risk [uncapped] Maximum reward [net credit received]

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This study gives me an opportunity to be familiarized with derivatives.

This study enlighten me about basic terms of options . I get to know that there are various types of strategies used in derivative market to minimize risk and to maximize the profit potentials. An investor should use strategies according to the market trend, keeping the risk and return payoff in mind.

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Investors should buy and sell contracts regularly because it generates more cash inflows than holding any position for a long time. Investors who are novice should use some basic strategies, like long call, short call, long put & short put. Although there are possibility of risk but that is less than other complex strategy.

Traders who are more experienced should use strategies having more than two tails. Although its very complex but it reduces risk more than basic strategies and also increased profit potential.
Investors who are reluctant to take high risk should use strategies have capped risk. Some of those are bear call spread, bear put spread, straddle, strangle. Investors who wants to take risk can go for short call, short put, short straddle , short strangle. 4/6/2014

From the whole study we get to know that well specified strategies are mow much important to get well return from your option contract. Although all the strategies are not useful for unlimited profit potential but it can be use as a risk hedging techniques. According to my understanding if an investor wants low risk, then he should buy call option when market is upward as there is low risk then selling put option. Similarly in bearish market investor should buy put option rather than selling call option.

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