IOSR Journal of Business and Management (IOSR-JBM)

e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 19, Issue 10. Ver. I. (October. 2017), PP 90-98
www.iosrjournals.org

A Study on “Optimizing Returns through Developing Effective

Option Trading strategy: With Reference to Stock Options
Traded in National Stock Exchange”
*
Shalini H S1, Dr. R. Duraipandian2
1
(Department of MBA, PESIT-Bangalore South Campus, India)
2
(Department of MBA, PESIT-Bangalore South Campus, India)
Corresponding Author: Shalini H S

Abstract: Options are effective risk management tools which are used worldwide. Options are a type of
derivative instruments which will offer only the right but not the obligation to trade in a specific underlying
asset. In order to occupy this right the option holder should pay premium while entering into an option
contract. This Premium will act as a source of expense to the option holder and the same is a source of return
to the option writer. Therefore option traders must be very careful while deciding on the price of an option
contract that is the premium. It is a well known fact that premium outlay can be minimized by effectively
implementing option trading strategies. This research study involves optimizing the returns to the option trader
by analysing and identifying four option trading strategies which are popularly known as cheap option trading
strategies in terms of premium outlay. For the study two most actively traded index options and fifty most
actively traded individual stock option contracts have been identified and the profit or loss profile is created in
order to determine the optimal strategy which involves less premium outlay thereby optimizing returns to the
option trader.
Keywords: Bear Put Spread, , Bull Call Spread, Long Iron Condor, Options, Option Trading strategies(OTSs),
Short Put Synthetic Straddle
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Date of Submission: 29-09-2017 Date of acceptance: 07-10-2017
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I. Introduction
It is a well known fact that option premium which is also known as price of an option contract is a
source of expense to the option holder. Hence it should be minimized in order to optimize returns by trading in
options contract. This premium can be minimized by effectively implementing the option trading strategies
rather than trading in single option contract. For the same purpose four option trading strategies which are
comparatively cheap are chosen for the study and a comparative study is made in order to find out the optimal
strategy which will optimize the returns to the option trader. These four cost effective option trading strategies
are Bull Call Spread, Bear Put Spread, Short Put Synthetic Straddle and Long Iron Condor.

II. Statement Of The Problem

Trading in options involves payment of premium. Traders will face problems while deciding on the
price of an option contract i.e. how much premium to pay for a particular Option contract involving a particular
underlying asset. It is found that option premium is a major expense to the option holder. Therefore an attempt
was made to identify an effective option trading strategy which is cost effective and convenient to the trader
irrespective of the market conditions that are prevailing. Here the main objective is to minimize the premium
expense to the option holder while trading in an underlying stock or index whose price is range bound.

III. Review Of Literature

Diane Krueger examined the basics of options and recommends trading strategies. The author had
mentioned in the study that investors treat options as less risky instruments but they should know what they are
getting before getting into options contracts. The author further states that Options suffer from their own hazards
though they are free from risk. In this research work the author has mentioned the hazards of trading in options,
advantages and limits of trading in options; Risks involved; Variety of trading options depending on the
underlying product; Elements that determine the premium of options; Possible scenarios if a trader purchases 10
call options (Kreuger, 2000).
Jackwerth, JC, Jackwerth, Jens Carsten focused on the recovery of risk aversion functions from option
prices and realized returns on the Standard and Poor's 500 Stock Index. Changes in risk aversion functions

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A Study on “Optimizing Returns through Developing Effective Option Trading strategy: With
before, during and after the 1987 stock market crash; Mispricing in the option market; Role of simulated trading
strategy on excess returns. The author has tried to establish relationship between aggregate risk neutral and
subjective probability distributions and risk aersion functions (Jackwerth, 2000).
Jones & Richard L. focused on the strategy of cash-free trading with the money market in the U.S.
Advantages of cash-free trading on the current account cash balance; In this article the author stated that
cashless trading doesnot mean a trade free of cash but it means using others money in order to trade in the
market. This study gives an idea of how to do cashless trade rather than predicting the market movements.
Approach of the trading strategy by option selling; Benefit of credit spread on the reduced margin (Jones, May
2002).
Chen, An-Sing presented a study focused on the trading of at-the-money straddles using options on
foreign currency futures, namely British Pound, Canadian Dollar, and Japanese Yen. In the present study the
financial performance and economic significance of a direct profit forecast trading strategy are examined. This
strategy uses a linear projection to directly forecast the profit of engaging in a straddle. The straddle is
purchased when the forecast is positive and sold when negative. This is derived from the conventional option
trading strategy of basing trading decisions on a two-step procedure of first generating a volatility forecast and
then inputting the volatility forecast into an appropriate option pricing model to price the straddle. Through the
study it was found that the direct profit forecast trading strategy removes volatility forecasting and option-
pricing models from the straddle trading decision process altogether. This method has only one source of model
risk, compared to the conventional two-step method which has two sources of model risk and it is possible that
the direct forecast trading strategy with only one source of model risk may outperform the conventional method
of trading straddles. Through the experimental investigation it was confirmed this notion and the out-of-sample
results indicate that, for each of the currencies analysed, the direct forecasting strategy is more profitable than
the conventional two-step method. Furthermore, the results are robust with respect to di1erent transaction cost
assumptions. Finally it was concluded that, tests of economic significance indicate consistent market timing
value for the direct forecast method (LEUNG A.-S. C., 2003).
Parnos, Mike discussed strategies in equity trading. This paper gives us the overview of utilization of
long-term dated options at the major options exchanges; Nature of in-the-money strangle purchase; Translation
of higher volatility in higher premiums. In this paper the auhtor had mentioned that money is neither created
nor destroyed in the market but it only changes in hands. The author also points out that being an investor our
motto should be to find money in the market. In the same sense the author discusses about Leaps which are
famous financial instruments through which an investor can make money (Parsons, February 2003).
Chong & James examined the profitability of trading currency straddles on the basis of the volatility
and correlation forecasts derived from various statistical models. They provided evidence to demonstrate that for
maximum wealth accumulation, a trader should employ sophisticated models like the exponential GARCH for
correlation forecasts and simpler ones like the exponential weighted moving average for volatility forecasts. In
this changing market conditions with differing transaction costs structure between traders, the directional bets
taken by the models of the market maker for the most part appear successful, reaping large positive returns. This
is especially evident for GBP/DEM straddles and to a lesser extent for JPY/DEM straddles. However, the
authors made a point that the options trading strategy profits of the price taker are insufficient to outweigh
transaction costs, a result considered consistent with market efficiency (CHONG, 2004).
Charles Cao, Haitao Li & Fan Yu stated several recent studies which present evidence of investors
misreaction in the options market. Although the interpretation of their results is still controversial, the important
question of economic significance has not been fully addressed. In this study this gap is addressed by
formulating regression-based tests to identify misreaction and its duration and constructing trading strategies to
exploit the empirical patterns of misreaction. Regular S&P 500 index options and long-dated S&P 500 LEAPS
are used to find an underreaction that on average dissipates over the course of 3 trading days and an increasing
misreaction that peaks after four consecutive daily variance shocks of the same sign. Option trading strategies
based on these findings produce economically significant abnormal returns in the range of 1–3% per day.
However the authors also found that they are not profitable in the presence of transaction costs (CHARLES
CAO, 2005).
Avellaneda, Marco presented the view regarding the interrelation of option pricing theory and
quantitative trading strategies. The author believed that the quantitative finance community has made a
significant progress in option valuation when it comes to inferring pricing kernels and their relation to entailed
volatility surfaces, at the single stock level. The author also provided an overview of U.S. stock markets and
European markets and tried to establish the relationship between the price variations through correlation as a
statistical tool. In this paper Key concepts on pricing theory and trading are discussed by the author
(Avellaneda, OCTOBER 2004).
Chaput, J. Scott & Ederington, Louis H. discussed that vertical spreads (bull and bear spreads) are a
popular options trading strategy. In the Eurodollar futures options market, they represent about 9.4% of all

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A Study on “Optimizing Returns through Developing Effective Option Trading strategy: With
option trades of 100 contracts or more and account for about 11.6% of the trading volume. The article examines
trade of vertical spreads for Eurodollar futures options to see how vertical spreads are designed and what those
designs tell us about the objectives of vertical spread traders. The authors Compared vertical spreads with
simple call and put positions, they first ask whether most vertical spread traders choose vertical spreads in order
to reduce their risk and margin requirements on short positions or to reduce the net cost and raise the likelihood
of gain on long positions. The authors found that many of the advantages of vertical spreads claimed in the
practitioner literature appear unimportant to the majority of vertical spread traders. The authors also observed
that for opening positions, the proportion of bull spreads in the sample is somewhat greater than 53.2%
(EDERINGTON, 2005).
Landis, David says investors that “if you are like most shareholders, your repertoire of money-making
moves is limited. You buy, maybe you collect dividends, and you wait for the price to ties. It's a safe strategy
that works well in bull markets, not so well in bear markets”. Jennifer Duce felt she needed to be more
aggressive, especially after her employer of 16 years. United Airlines, defaulted on its pension obligations early
this year. Duce, a pilot who lives in Miami, has been trading options, hoping she can rebuild her retirement
savings more quickly. "As long as stocks are moving, you can make money with options," says Duce. Until
recently, options were considered the province of professional traders, too complicated and risky for most
individual investors. But the growth of online trading has begun to demystify options investing. Many online
brokerages offer options trading, and commissions ate comparable to those charged for stock trades. But trading
options is more complex than buying and selling stocks. It can be risky, too, although it doesn't have to be. "Just
because people speculate in real estate should not stop you from buying a home," says David Kalt, chief
executive of OptionsXpress, a brokerage that specializes in options trading. "The same goes for options."
Further the author states that Buying puts, for example, is a way to immunize your portfolio against falling
prices. And selling covered calls is a fairly safe way to generate income (Landis, OCTOBER 2OO5).

IV. Objectives Of The Study

Objectives of the present study are:
• To optimize returns to the option traders by developing an effective option trading strategy with special
reference to stock and index options traded at National Stock Exchange.
• To compare the effectiveness of selected option trading strategies for selected stock and index options for a
selected period of time.
• To create payoff profiles for selected option trading strategies for selected stock and index options for a
selected period of time.
• To suggest the suitable and effective option trading strategies for selected stock and index options.

V. Hypothesis Stated For The Study

The following hypothesis has been formulated in order to test the effectiveness of the four selected option
trading strategies:
5.1 H0 – Bull Call Ladder strategy is indifferent in minimizing the loss of premium to the option holder in case
of index options.
H1 – Bull Call Ladder Strategy will make a difference in minimizing the loss of premium to the option
holder in case of index options.
5.2. H0 – Bull Call Ladder strategy is indifferent in minimizing the loss of premium to the option holder in case
of individual stock options.
H1 – Bull Call Ladder Strategy will make a difference in minimizing the loss of premium to the option
holder in case of individual stock options.
5.3. H0 – Bear Put Ladder strategy is indifferent in minimizing the loss of premium to the option holder in case
of index options.
H1 – Bear Put Ladder Strategy will make a difference in minimizing the loss of premium to the option
holder in case of index options.
5.4. H0 – Bear Put Ladder strategy is indifferent in minimizing the loss of premium to the option holder in case
of individual stock options.
H1 – Bear Put Ladder Strategy will make a difference in minimizing the loss of premium to the option
holder in case of individual stock options.
5.5. H0 – Short Put Synthetic Straddle strategy is indifferent in minimizing the loss of premium to the option
holder in case of index options.
H1 – Short Put Synthetic Straddle Strategy will make a difference in minimizing the loss of premium to
the option holder in case of index options.
5.6 H0 – Short Put Synthetic Straddle strategy is indifferent in minimizing the loss of premium to the option
holder in case of individual stock options.

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A Study on “Optimizing Returns through Developing Effective Option Trading strategy: With
H1 – Short Put Synthetic Straddle Strategy will make a difference in minimizing the loss of premium to the
option holder in case of individual stock options.
5.7 H0 – Long Iron Butterfly strategy is indifferent in minimizing the loss of premium to the option holder in
case of index options.
H1 – Long Iron Butterfly Strategy will make a difference in minimizing the loss of premium to the option
holder in case of index options
5.8 H0 – Long Iron Butterfly strategy is indifferent in minimizing the loss of premium to the option holder in
case of individual stock options.
H1 – Long Iron Butterfly Strategy will make a difference in minimizing the loss of premium to the option
holder in case of individual stock options.

VI. Research Methodology

6.1 Research Design: It is an analytical research as it involves calculation of profit or loss profile of option
traders by using the option premium and the possible prices of the underlying stock.
6.2 Sampling technique: For the present study consecutive sampling technique was followed to collect data
6.3 Type of data: For the present study the secondary data from National Stock Exchange was collected.
6.4 Sample size: For the present study 2 most actively traded index options 50 most actively traded individual
stock options were selected from NSE website.
6.5 Selected Indices and Stock Option Contracts:
The following table will summarize the index options and individual stock options with their NSE symbol
selected for the study:

Table 1: Selected Index and Stock Options for Research Study

Sl. No. Selected Index Options Symbol
1 Nifty Bank BANKNIFTY
2 Nifty 50 NIFTY
Sl. No. Selected Individual Stock Options Symbol
1 Infosys Limited INFY
2 Tata Consultancy Services Limited TCS
3 State Bank of India SBIN
4 Reliance Industries Limited RELIANCE
5 Aurobindo Pharma Limited AUROPHARMA
6 Reliance Capital Limited RELCAPITAL
7 Hindalco Industries Limited HINDALCO
8 Yes Bank Limited YESBANK
9 Canara Bank CANBK
10 Maruti Suzuki India Limited MARUTI
11 Tata Steel Limited TATASTEEL
12 DLF Limited DLF
13 Vedanta Limited VEDL
14 Bharat Financial Inclusion Limited BHARATFIN
15 Kotak Mahindra Bank Limited KOTAKBANK
16 Punjab National Bank PNB
17 HDFC Bank Limited HDFCBANK
18 Rural Electrification Corporation Limited RECLTD
19 Axis Bank Limited AXISBANK
20 Tata Motors Limited TATAMOTORS
21 Jubilant Foodworks Limited JUBLFOOD
22 TV18 Broadcast Limited TV18BRDCST
23 Adani Enterprises Limited ADANIENT
24 Bank of Baroda BANKBARODA
25 Sun Pharmaceutical Industries Limited SUNPHARMA
26 Ashok Leyland Limited ASHOKLEY
27 ITC Limited ITC
28 The Federal Bank Limited FEDERALBNK
29 Dewan Housing Finance Corporation Limited DHFL
30 Reliance Infrastructure Limited RELINFRA
31 Housing Development Finance Corporation Limited HDFC
32 Sun TV Network Limited SUNTV
33 Hindustan Unilever Limited HINDUNILVR
34 Indian Oil Corporation Limited IOC
35 Voltas Limited VOLTAS
36 ACC Limited ACC
37 IndusInd Bank Limited INDUSINDBK
38 Union Bank of India UNIONBANK

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A Study on “Optimizing Returns through Developing Effective Option Trading strategy: With
39 Oil & Natural Gas Corporation Limited ONGC
40 GMR Infrastructure Limited GMRINFRA
41 DCB Bank Limited DCBBANK
42 Bank of India BANKINDIA
43 Bajaj Finance Limited BAJFINANCE
44 CESC Limited CESC
45 Sintex Industries Limited SINTEX
46 Oriental Bank of Commerce ORIENTBANK
47 BEML Limited BEML
48 Zee Entertainment Enterprises Limited ZEEL
49 Wipro Limited WIPRO
50 Divi's Laboratories Limited DIVISLAB
Source: www.nseindia.com

6.6 Selection Criteria for OTSs: Based on the results obtained from the analysis of Primary data it was found
that Option Premium will act as the major source of expense to the option trader. The small portion of the same
which supports the above statement is mentioned below:

Table 2: Traders perception towards option premium as a major source of expense

Strongly Strongly
Variable Agree Neutral Disagree
agree Disagree
Option Premium is a major source of expense to
225 138 18 2 1
option trader
Source: Survey

Chart 1: Traders perception towards option premium as a major source of expense

Source: Survey

Analysis and Interpretation: From the above table and chart it can be interpreted that most of the option
traders believe that option premium acts as major source of expense while trading in options contract. This
research study makes an attempt to find an effective option trading strategy which is cost effective in terms of
payment of premium.

6.7 Brief description of selected OTSs:

For the present study four option trading strategies which are well known as cheap Option Trading Strategies
(Guy Cohen, 2013) were selected. They are as follows:
6.7.1. Bull Call Ladder: Also known as long call ladder is an extension to Bull Call Spread. This strategy is a
limited profit, unlimited risk strategy that is employed when an option trader thinks that the underlying security
will experience little volatility in the near term. To implement long call ladder the trader purchases an in-the-
money call, sells an at-the-money call and sells another higher strike out-of-the-money call of the same
underlying security and expiration date.

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A Study on “Optimizing Returns through Developing Effective Option Trading strategy: With
6.7.2 Bear Put Ladder: Also known as long put ladder is an extension to the Bear Put Spread. It is a limited
profit unlimited risk strategy that is employed when an option trader thinks that the underlying security will
experience little volatility in the near term. To incorporate the long put ladder the trader purchases an in-the-
money put, sells an at-the-money put and sells another lower strike out-of-the-money put of the same underlying
security and expiration date.
6.7.3 Short Put Synthetic Straddle: is the recreation of short straddle strategy. It is a limited profit unlimited
risk strategy is employed when an option trader thinks that the underlying security will experience little
volatility in the near term. To set this strategy a trader will short the underlying stock and sells enough at-the-
money puts to cover twice the number of shares sold. That is, the trader will make sure that for every 100
shares sold, 2 put contracts must be written.
6.7.4 Long Iron Butterfly: is an intermediate strategy which is a combination of a Bull Put Spread and a Bear
Call Spread. It is a limited risk limited profit trading strategy which is employed when the underlying stock is
perceived to have a low volatility. To setup an iron butterfly, the options trader buys a lower strike out-of-the-
money put, sells a middle strike at-the-money put, sells a middle strike at-the-money call and buys another
higher strike out-of-the-money call.
The present study will implement the above four strategies on two most actively traded indices and fifty
individual stock options which are most actively traded in National Stock Exchange.
6.8 Period of Study: For the present study the Spot price and the Exercise price are taken for the month of July
2017.

VII. Results and Discussion

Table 3: Comparison of Premium Outlay for Selected OTSs
STRATEGIES
Short Put Synthetic
Bull Call Ladder Bear Put Ladder Long Iron Butterfly
Sl. Selected Straddle
N Indices & Premi Premi Pre Premi Premi
Premi Total Premi Total Total Prem Total
o. Stocks um um miu um um
um Premi um Premi Premi ium Premi
Receiv Receiv m Receiv Receiv
Paid um Paid um um Paid um
ed ed Paid ed ed
BANKNIF
1 45695 35620 -10075 32795 25650 -7145 NIL 34810 34810 19175 42095 22920
TY
2 NIFTY 18000 7980 -10020 15205 9015 -6190 NIL 12820 12820 4065 12930 8865
3 INFY 4905 2200 -2705 3600 1355 -2245 NIL 2260 2260 685 2870 2185
-
4 TCS 15600 3825 -11775 13780 3060 NIL 5580 5580 660 6225 5565
10720
5 SBIN 1460 755 -705 1880 635 -1245 NIL 1080 1080 180 1210 1030
RELIANC
6 7610 4175 -3435 5985 2905 -3080 NIL 4530 4530 1720 5360 3640
E
AUROPHA
7 7505 3965 -3540 6100 2270 -3830 NIL 3900 3900 1275 4960 3685
RMA
RELCAPIT
8 2930 2685 -245 2320 2140 -180 NIL 2880 2880 1635 3190 1555
AL
HINDALC
9 1340 455 -885 800 815 15 NIL 1050 1050 135 930 795
O
10 YESBANK 9025 6040 -2985 4650 2110 -2540 NIL 3260 3260 2130 6020 3890
11 CANBK 2250 1715 -535 1400 1395 -5 NIL 1790 1790 920 2060 1140
12 MARUTI 21200 22235 1035 11060 6645 -4415 NIL 9700 9700 8355 18625 10270
TATASTE
13 3165 1090 -2075 2080 995 -1085 NIL 1580 1580 240 1740 1500
EL
14 DLF 1370 515 -855 1045 920 -125 NIL 1130 1130 195 1000 805
15 VEDL 1850 820 -1030 1185 600 -585 NIL 890 890 245 1115 870
BHARATF
16 5465 1590 -3875 6940 3505 -3435 NIL 5480 5480 1030 4100 3070
IN
KOTAKB
17 3350 3085 -265 1790 2110 320 NIL 2560 2560 1345 3380 2035
ANK
18 PNB 1810 615 -1195 1215 305 -910 NIL 520 520 105 815 710
HDFCBAN
19 7500 3145 -4355 3575 1535 -2040 NIL 2440 2440 850 3665 2815
K
20 RECLTD 985 305 -680 1090 365 -725 NIL 630 630 60 575 515
AXISBAN
21 6165 4660 -1505 1400 410 -990 NIL 700 700 1350 3720 2370
K
TATAMO
22 4000 1495 -2505 2050 265 -1785 NIL 460 460 180 1580 1400
TORS
JUBLFOO
23 8550 5395 -3155 5085 2260 -2825 NIL 3600 3600 1860 5795 3935
D
TV18BRD
24 225 45 -180 290 115 -175 NIL 200 200 65 140 75
CST
ADANIEN
25 1550 355 -1195 1000 365 -635 NIL 630 630 70 630 560
T
BANKBA
26 1250 180 -1070 725 730 5 NIL 1000 1000 50 665 615
RODA
SUNPHAR
27 7740 2000 -5740 4085 135 -3950 NIL 250 250 75 2060 1985
MA

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A Study on “Optimizing Returns through Developing Effective Option Trading strategy: With
ASHOKLE
28 320 105 -215 830 395 -435 NIL 630 630 105 395 290
Y
29 ITC 2015 745 -1270 1200 285 -915 NIL 480 480 155 875 720
FEDERAL
30 930 455 -475 460 110 -350 NIL 200 200 95 470 375
BNK
31 DHFL 3500 1405 -2095 2265 405 -1860 NIL 710 710 250 1560 1310
RELINFR
32 6150 1545 -4605 4205 310 -3895 NIL 610 610 80 1775 1695
A
33 HDFC 4870 2160 -2710 5745 1455 -4290 NIL 2700 2700 405 3210 2805
34 SUNTV 5605 975 -4630 4700 2765 -1935 NIL 5130 5130 315 3425 3110
HINDUNI
35 4000 1990 -2010 2460 1130 -1330 NIL 1740 1740 710 2410 1700
LVR
36 IOC 4220 1350 -2870 1880 155 -1725 NIL 290 290 460 1395 935
37 VOLTAS 3480 1155 -2325 1380 350 -1030 NIL 620 620 100 1385 1285
38 ACC 2830 1080 -1750 6690 5625 -1065 NIL 8990 8990 1390 5315 3925
INDUSIND
39 6705 2105 -4600 7390 1030 -6360 NIL 1800 1800 405 2730 2325
BK
UNIONBA
40 1460 225 -1235 1710 320 -1390 NIL 620 620 35 510 475
NK
41 ONGC 1125 625 -500 425 65 -360 NIL 110 110 115 575 460
GMRINFR
42 355 65 -290 210 20 -190 NIL 30 30 10 75 65
A
DCBBAN
43 1940 290 -1650 1250 335 -915 NIL 620 620 65 560 495
K
BANKIND
44 1470 1025 -445 220 120 -100 NIL 170 170 300 845 545
IA
BAJFINAN
45 6300 2305 -3995 2990 2810 -180 NIL 3820 3820 635 3905 3270
CE
46 CESC 5560 1750 -3810 6400 1630 -4770 NIL 3100 3100 380 3000 2620
47 SINTEX 1300 515 -785 180 15 -165 NIL 20 20 50 480 430
ORIENTB
48 1150 600 -550 840 180 -660 NIL 270 270 155 625 470
ANK
49 BEML 20700 12505 -8195 7815 610 -7205 NIL 1100 1100 1720 11395 9675
50 ZEEL 3180 725 -2455 2775 675 -2100 NIL 1300 1300 90 1310 1220
51 WIPRO 1800 525 -1275 1060 180 -880 NIL 330 330 65 605 540
52 DIVISLAB 2910 220 -2690 6890 3900 -2990 NIL 6180 6180 370 3265 2895
Source: Calculation from the research study
VIII. Major Findings Of The Study
8.1 Findings for H1 for Bull Call Ladder OTS:
H1: From the above analysis and interpretations of payoff profiles pertaining to index options and
individual stock options it is can found that there is no statistically significant difference in payoff profile of
Bull Call Ladder strategy on Index options and also individual Stock Options, because the total premium
outflow is negative compared to other three Option Trading Strategies. Hence in the case of Bull Call Ladder
Option trading strategy Null Hypothesis is accepted and H1 is rejected.
8.2 Findings of H1 for Bear Put Ladder OTS:
H1: From the above analysis and interpretations of payoff profiles pertaining to index options and
individual stock options it is can found that there is no statistically significant difference in payoff profile of
Bear Put Ladder strategy on Index options and also individual Stock Options, because the total premium outflow
is negative compared to other three Option Trading Strategies. Hence in the case of Bear Put Ladder Option
trading strategy Null Hypothesis is accepted and H1 is rejected.
8.3 Findings of H1 for Short Put Synthetic Straddle OTS:
8.3.1 Findings of H1 for Short Put Synthetic Straddle OTS for Index options:
H1: From the above analysis and Interpretation of payoff profiles pertaining to index options it is found
that the premium inflow is maximum in case of Short Put Synthetic Straddle for both Nifty Bank and Nifty.
Hence it can be said that in case of index options Short Put Synthetic Straddle will make a difference in terms of
inflow of Premium compared to other option trading strategies. Therefore the Null Hypothesis is rejected and
H1 is accepted in this case.
8.3.2 Findings of H1 for Short Put Synthetic Straddle OTS for Individual Stock options:
H1: From the above analysis and Interpretation of payoff profiles pertaining to individual stock options
it is found that the premium inflow is maximum in case of Short Put Synthetic Straddle for 27 Individual stock
options out of 50 stock options selected for data analysis and interpretation. Hence it can be said that in case of
individual stock options Short Put Synthetic Straddle will make a difference in terms of inflow of Premium
compared to other option trading strategies. Therefore the Null Hypothesis is rejected and H1 is accepted in this case.
8.4 Findings of H1 for Long Iron Butterfly OTS:
8.4.1 Findings of H1 for Long Iron Butterfly OTS for Index options:
H1: From the above analysis and Interpretation of payoff profiles pertaining to index options it is found
that the premium inflow is optimal in case of Long Iron Butterfly for both Nifty Bank and Nifty. Here the
optimal is used because the Premium inflow is less than Short Put Synthetic Straddle and more than Bull Call

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A Study on “Optimizing Returns through Developing Effective Option Trading strategy: With
Ladder and Bear Put Ladder Strategies. Hence it can be said that in case of index options Short Put Synthetic
Straddle will make a difference in terms of inflow of Premium compared to other option trading strategies.
Therefore the Null Hypothesis is rejected and H1 is accepted in this case.
8.4.2 Findings of H1 for Long Iron Butterfly OTS for Individual Stock options:
H1: From the above analysis and Interpretation of payoff profiles pertaining to individual stock options
it is found that the premium inflow is maximum in case of Long Iron Butterfly for 23 Individual stock options
out of 50 stock options and it is optimal in case of the rest 27 stocks selected for data analysis and interpretation.
Hence it can be said that in case of individual stock options Long Iron Butterfly will make a difference in terms
of inflow of Premium compared to other option trading strategies. Therefore the Null Hypothesis is rejected and
H1 is accepted in this case.

IX. Conclusion
From the above stated analysis and findings following conclusion can be made:
• Bull call ladder OTS will not have a significant impact on optimizing the returns to option trader as it gives
negative premium payoff in case of index options.
• Bull call ladder OTS will not have a significant impact on optimizing the returns to option trader as it gives
negative premium payoff in case of individual stock options.
• Bear put ladder OTS will not have a significant impact on optimizing the returns to option trader as it gives
negative premium payoff in case of index options.
• Bear put ladder OTS will not have a significant impact on optimizing the returns to option trader as it gives
negative premium payoff in case of individual stock options.
• Short put synthetic straddle OTS will have a significant impact on optimizing the returns to option trader as
it gives positive and maximum premium inflow out of all four OTSs selected.
• Short put synthetic straddle OTS will have a significant impact on optimizing the returns to option trader as
it gives positive and maximum premium inflow for 27 individual stock options out of 50 individual stock
options selected. Compared to other three OTSs this strategy is optimal and effective in minimizing the
premium expense to the option trader.
• Long iron butterfly OTS will have a significant impact on optimizing the returns to option trader as it gives
positive and optimal premium inflow out of all four OTSs selected.
• Long iron butterfly OTS will have a significant impact on optimizing the returns to option trader as it gives
positive and optimal premium inflow for 23 individual stock options out of 50 individual stock options
selected. Compared to other three OTSs this strategy is optimal and effective in minimizing the premium
expense to the option trader next to Short put synthetic straddle OTS.

References

[1]. Avellaneda, M. (OCTOBER 2004). A look ahead at options pricing and volatility. QUANTITATIVE FINANCE VOLUME 4,
C51–C54.
[2]. CHARLES CAO, H. L. (2005). IS INVESTOR MISREACTION ECONOMICALLY SIGNIFICANT? EVIDENCE FROM
SHORT- AND LONG-TERM S&P 500 INDEX OPTIONS. The Journal of Futures Markets, 717–752.
[3]. CHONG, J. (2004). Options trading profits from correlation forecasts. Applied Financial Economics, 1075–1085.
[4]. EDERINGTON, J. S. (2005). Vertical Spread Design. SPRING, pp 28-46.
[5]. Jackwerth, J. C. (2000). Recovering risk aversion from option prices and realized returns . The review of Financial Studies Summer
2000, pp 433-451.
[6]. Jones, R. L. ( May 2002). Trading with the Market's Money. Futures Magazine, pp 48-50.
[7]. Kreuger, D. (2000). Opting for Options . FUTURES, 70-72.
[8]. Landis, D. (OCTOBER 2OO5). How to win in any kind of market. Investing, 50-53.
[9]. LEUNG, A.-S. C. (2003). Option straddle trading: Financial performance and economic significance of direct profit forecast and
conventional strategies. Applied Economics Letters, 493–498.
[10]. Parsons, M. (February 2003). Strangling the Market . FUTURES, 34-35.

Appendix
Comparison of Premium Outlay for Selected OTSs

STRATEGIES
Bull Call Ladder Bear Put Ladder Short Put Synthetic Straddle Long Iron Butterfly

Sl.
Selected Indices Premiu Premiu Premiu Premiu
No Premi Total Total Total Total
& Stocks m Premiu m Premiu m Premiu m
. um Premiu Premiu Premiu Premiu
Receive m Paid Receive m Paid Receive m Paid Receive
Paid m m m m
d d d d

DOI: 10.9790/487X-1910019098 www.iosrjournals.org 97 | Page

A Study on “Optimizing Returns through Developing Effective Option Trading strategy: With
1 BANKNIFTY 45695 35620 -10075 32795 25650 -7145 NIL 34810 34810 19175 42095 22920
2 NIFTY 18000 7980 -10020 15205 9015 -6190 NIL 12820 12820 4065 12930 8865
3 INFY 4905 2200 -2705 3600 1355 -2245 NIL 2260 2260 685 2870 2185
4 TCS 15600 3825 -11775 13780 3060 -10720 NIL 5580 5580 660 6225 5565
5 SBIN 1460 755 -705 1880 635 -1245 NIL 1080 1080 180 1210 1030
6 RELIANCE 7610 4175 -3435 5985 2905 -3080 NIL 4530 4530 1720 5360 3640
7 AUROPHARMA 7505 3965 -3540 6100 2270 -3830 NIL 3900 3900 1275 4960 3685
8 RELCAPITAL 2930 2685 -245 2320 2140 -180 NIL 2880 2880 1635 3190 1555
9 HINDALCO 1340 455 -885 800 815 15 NIL 1050 1050 135 930 795
10 YESBANK 9025 6040 -2985 4650 2110 -2540 NIL 3260 3260 2130 6020 3890
11 CANBK 2250 1715 -535 1400 1395 -5 NIL 1790 1790 920 2060 1140
12 MARUTI 21200 22235 1035 11060 6645 -4415 NIL 9700 9700 8355 18625 10270
13 TATASTEEL 3165 1090 -2075 2080 995 -1085 NIL 1580 1580 240 1740 1500
14 DLF 1370 515 -855 1045 920 -125 NIL 1130 1130 195 1000 805
15 VEDL 1850 820 -1030 1185 600 -585 NIL 890 890 245 1115 870
16 BHARATFIN 5465 1590 -3875 6940 3505 -3435 NIL 5480 5480 1030 4100 3070
17 KOTAKBANK 3350 3085 -265 1790 2110 320 NIL 2560 2560 1345 3380 2035
18 PNB 1810 615 -1195 1215 305 -910 NIL 520 520 105 815 710
19 HDFCBANK 7500 3145 -4355 3575 1535 -2040 NIL 2440 2440 850 3665 2815
20 RECLTD 985 305 -680 1090 365 -725 NIL 630 630 60 575 515
21 AXISBANK 6165 4660 -1505 1400 410 -990 NIL 700 700 1350 3720 2370
22 TATAMOTORS 4000 1495 -2505 2050 265 -1785 NIL 460 460 180 1580 1400
23 JUBLFOOD 8550 5395 -3155 5085 2260 -2825 NIL 3600 3600 1860 5795 3935
24 TV18BRDCST 225 45 -180 290 115 -175 NIL 200 200 65 140 75
25 ADANIENT 1550 355 -1195 1000 365 -635 NIL 630 630 70 630 560
26 BANKBARODA 1250 180 -1070 725 730 5 NIL 1000 1000 50 665 615
27 SUNPHARMA 7740 2000 -5740 4085 135 -3950 NIL 250 250 75 2060 1985
28 ASHOKLEY 320 105 -215 830 395 -435 NIL 630 630 105 395 290
29 ITC 2015 745 -1270 1200 285 -915 NIL 480 480 155 875 720
30 FEDERALBNK 930 455 -475 460 110 -350 NIL 200 200 95 470 375
31 DHFL 3500 1405 -2095 2265 405 -1860 NIL 710 710 250 1560 1310
32 RELINFRA 6150 1545 -4605 4205 310 -3895 NIL 610 610 80 1775 1695
33 HDFC 4870 2160 -2710 5745 1455 -4290 NIL 2700 2700 405 3210 2805
34 SUNTV 5605 975 -4630 4700 2765 -1935 NIL 5130 5130 315 3425 3110
35 HINDUNILVR 4000 1990 -2010 2460 1130 -1330 NIL 1740 1740 710 2410 1700
36 IOC 4220 1350 -2870 1880 155 -1725 NIL 290 290 460 1395 935
37 VOLTAS 3480 1155 -2325 1380 350 -1030 NIL 620 620 100 1385 1285
38 ACC 2830 1080 -1750 6690 5625 -1065 NIL 8990 8990 1390 5315 3925
39 INDUSINDBK 6705 2105 -4600 7390 1030 -6360 NIL 1800 1800 405 2730 2325
40 UNIONBANK 1460 225 -1235 1710 320 -1390 NIL 620 620 35 510 475
41 ONGC 1125 625 -500 425 65 -360 NIL 110 110 115 575 460
42 GMRINFRA 355 65 -290 210 20 -190 NIL 30 30 10 75 65
43 DCBBANK 1940 290 -1650 1250 335 -915 NIL 620 620 65 560 495
44 BANKINDIA 1470 1025 -445 220 120 -100 NIL 170 170 300 845 545
45 BAJFINANCE 6300 2305 -3995 2990 2810 -180 NIL 3820 3820 635 3905 3270
46 CESC 5560 1750 -3810 6400 1630 -4770 NIL 3100 3100 380 3000 2620
47 SINTEX 1300 515 -785 180 15 -165 NIL 20 20 50 480 430
48 ORIENTBANK 1150 600 -550 840 180 -660 NIL 270 270 155 625 470
49 BEML 20700 12505 -8195 7815 610 -7205 NIL 1100 1100 1720 11395 9675
50 ZEEL 3180 725 -2455 2775 675 -2100 NIL 1300 1300 90 1310 1220
51 WIPRO 1800 525 -1275 1060 180 -880 NIL 330 330 65 605 540
52 DIVISLAB 2910 220 -2690 6890 3900 -2990 NIL 6180 6180 370 3265 2895
53 DRREDDY 21200 5120 -16080 12000 7165 -4835 NIL 10790 10790 1675 9740 8065

IOSR Journal of Business and Management (IOSR-JBM) is UGC approved Journal with Sl.
No. 4481, Journal no. 46879.

Shalini H S. “A Study on “Optimizing Returns through Developing Effective Option Trading

strategy: With Reference to Stock Options Traded in National Stock Exchange”.” IOSR
Journal of Business and Management (IOSR-JBM), vol. 19, no. 10, 2017, pp. 90–98.

DOI: 10.9790/487X-1910019098 www.iosrjournals.org 98 | Page