A READY RECKONER TO OPTIONS STRATEGY

Transcription

1 A READY RECKONER TO OPTIONS STRATEGY Jayshree Mandaviya, Assistant Professor Abstract Anand Commerce College, Sardar Patel University, V.V. Nagar A rational Economical Decision is one which takes proper care of Risk-Return trade-off. That is why Risk Management has drawn attention of many. Risk Management is recognition of risk, risk assessment, developing strategies to manage it and mitigating that risk. Among the various tools available for risk management; Derivatives Options have secured a special position because of its peculiar characteristics. This paper attempts to classify the various available strategies by its sentiments, which would act as a ready recknor for the potential option traders who probably don t have complete knowledge of all Option Strategies. Well, still the success lies in identifying the right sentiment. Thus, further this paper helps identify the current market sentiment with the help of Technical analysis viz. MACD and RSI. Finally, this paper gives empirical evidence for the same, which shows that it works. Key words: Risk Management, Derivatives, Options, Options Strategies, Sentiments, Technical Analysis, MACD, RSI. Objectives To identify and classify strategies according to the market sentiment To identify market sentiment by technical analysis To know according to strategy profit is possible or not. Methodology In the pursuit to A Ready Recknor to Options Strategy, To go through all the available option strategy and identify in each of them, following Strategy view The position(s) to be taken Break-even point at expire The upside potential The downside risk Margin Other hints and care to use respective strategy 165

2 Each available strategy was classified whether it would be applicable in the Bearish Relatively neutral market Bullish sentiment Volatile Each strategy was given sub- sentiments, such as the bullish sub- sentiments are Very bullish Moderately bullish + certain that the market will not fall Moderately bullish + fairly certain that the market will not fall Bearish in immediate near-term (weeks) + bullish in longer term (months) To Identify market sentiment MACD and RSI. MACD was used to identify the likely trend using 7 days, 1-month & 3-month. RSI was deployed to find out trend reversal (as found from MACD) MACD and RSI together answer the question of what is the Current Market Sentiment. Time Duration of data 11 months data from 1 March 2013 to 28 February 28, 2014 Sources of data Daily base stock and Indices Price Classification of the strategy Sentiments Sub- sentiments Strategy Diagrams Bullish Very bullish Buy Call Moderately bullish + certain that the market will not fall Sell Put 166

3 Moderately bullish + fairly certain that the market will not fall Bearish in immediate near-term (weeks) + bullish in longer term (months) Bull Spread (Calls) Or Bull Spread (Puts) Diagonal Spread Bearish Very bearish Buy Put Certain that the market will not rise Sell Call Moderately bearish + fairly certain that the market will not rise Flat or moderately Bullish in nearterm (weeks) + bearish in longer term (months) Hold stock and bearish Bear Spread (Call) Or Bear Spread (Put) Diagonal Spread Put Hedge - Hold Stock, Buy Put Neutral Expect prices to fluctuate in very narrow range Sell Straddle Prices might fluctuate in a broader range Sell Strangle Moderately certain that prices will not fluctuate much Long Butterfly 167

4 Short-term weakness but longer term rally Calendar Spread Hold stock but expect no movement Covered Call - Long Stock, Sell Call Volatile Expect prices to be very volatile Buy Straddle Expect prices to be volatile Buy Strangle moderately expect prices to be volatile Short Butterfly To Identify Market Sentiment Technical analysis NIFTY Moving Average Convergence and Divergence 168

5 RSI relative strength index Empirical evidence NIFTY and REL data of the 11 months from 1 March 2013 to 28 February 28, 2014 to find out the market sentiment with the help of the technical analysis (MACD and RSI) 2 nd sentiment and strategy were identifying. The market question which needs to be resolved is out of various available strike prices, which one should be entered into for the strategy. For this stander deviation of the 1-month of the November 2013 was taken, which suggest the ± value of the strike price from spot price. Again a proper trade off needs to be done between the strike price selected and the premium paid / received. For the squaring off the position in a profit, one needs to be vigilant to find out when the market moves into favorable areas (standard deviation can be used as an indicator of buy / sell signal) Symbol Strategy Adopted NIFTY REL Diagonal Strategy Long Call Position Date 3 rd Oct, rd Oct, rd Oct, 2013 Position Price - buy ( short time) + buy ( long time) - buy ( long position) Take position Square off Date Rs th Oct, 2010 Rs th Oct, 2010 Rs th Oct, 2010 Square off Price Net position Rs. 200 Rs. 86 Stock return Rs Rs Rs Rs. 170 Rs. 41 Rs

6 Conclusion One can gain easily from all market movement, with reasonably low or to be precise known risk with the help of the option strategy, by predicting the current market sentiment through the MACD and RSI. Still the success lies in the executing the strategy to the perfection because the desired Option Value last for the every short time, the above methodology is effective, but only a strong fundamental news can change the desired results. Thus one may in corporate strong fundamental news (if any) with our methodology. Limitation Fundamental news can alter the predicted market sentiment Bid and ask Spread is not considered. Brokerage charges are ignored. It is very difficult to implement this strategy in real life, where prices change every second. References 1. Vohra and Bagri, Future and Option, E2, Tata McGraw-Hill Publishing Company Limited: Hull, John C. Options, Future, and Other Derivative Securities. Englewood Cliffs: Prentice-Hall India Ltd.: Redhead, Keith. Financial Derivatives: An Introduction to Futures, Forwards, Options and Swaps. New Delhi: Prentice Hall of India: S Kevin. Portfolio Management:, E2. Prentice-Hall of India, New Delhi: V. K. Bhalla. Investment Management,E11, S Chand & Company Ltd., New Delhi: