Presentation On Derivatives and Technical Analysis

PRESENTATION ON DERIVATIVES
AND TECHNICAL ANALYSIS
By Adhvith Dhuddu
Friday, 27th November, 2009
SRN Adarsh College
QUESTION 1
BOOK PRIZE: One up on Wall Street
WHICH IS THE LARGEST

CORPORATION IN TERMS OF
MARKET CAPITALIZATION IN
THE WORLD?
Exxon Mobile, PetroChina or Industrial and Commercial
Bank of China (ICBC). Top 3, always switching places.
www.AdhvithDhuddu.com
QUESTION 2
BOOK PRIZE: Political Economy of the Global Financial Crisis
THE WORLD’S MOST RENOWNED

AND RESPECTED INVESTOR SAID
SOMETHING VERY SHOCKING
AND STARTLING ABOUT
DERIVATIVES. WHO IS IT AND
WHAT DID HE/SHE SAY?
QUESTION 3
BOOK PRIZE: Options and Futures - An Indian Perspective
CAN ANYONE TELL ME

WHAT IS THE MEANING
OF COUNTERPARTY RISK?
DERIVATIVES BASICS
A derivative is a financial instrument

which DERIVES its value from another
financial product (underlying asset)
There are derivative instruments available which
derive their value from:
INDICES COMMODITIES
INTEREST RATES CREDIT
CURRENCY EQUITIES/STOCK
DERIVATIVE INSTRUMENTS: OPTIONS AND
FUTURES
TEXT BOOK DEFINITION FOR OPTIONS
AN OPTION CONTRACT GIVES THE BUYER THE RIGHT,
BUT NOT THE OBLIGATION, TO BUY OR SELL A CERTAIN
NUMBER OF SHARES AT A FIXED PRICE, ON OR BEFORE
A FIXED DATE: WHAT A CONFUSING DEFINITION!! AS
COMPLICATED AND TORTUOUS AS POSSIBLE!!!
TEXT BOOK DEFINITION FOR FUTURE

FUTURES CONSIST OF CONTRACTS TO BUY OR SELL A
SPECIFIC UNDERLYING INSTRUMENT (STOCK/INDEX) AT
A SPECIFIC TIME IN THE FUTURE FOR A SPECIFIC PRICE.
OPTIONS BASICS
If you BUY the option contract for the book, you have the RIGHT to
purchase that book at the agreed price from the seller (with whom
you entered the contract with), but you don’t have to buy it from the
seller (i.e. not obligated). If you choose to buy it from the seller, the
seller HAS TO SELL IT TO YOU at the agreed contract price.
THE RIGHT: To buy or sell 100, 500, 2400 (depends on the
market lot) shares of a specific stock or index.
THE EXPIRATION DATE: The date that your right ends or expires
THE EXERCISE PRICE: The price at which you can buy or sell
THE OPTION PRICE (or option premium): The price you paid for
the right. www.AdhvithDhuddu.com
OPTIONS BASICS CONTINUED
Based on Right to Exercise

Call options and put options
BUYER SELLER
CALL OPTION Right to buy Obligation to sell
PUT OPTION Right to sell Obligation to buy
Based on Time to Exercise

American Options: Can be exercised any time up to maturity date
European options: Can be exercised only on maturity date
OPTIONS BASICS CONTINUED
VALUING EQUITY OPTIONS
• THE OPTION PREMIUM IS HOW MUCH YOU PAY TO
PURCHASE THE OPTION, OR HOW MUCH YOU RECEIVE TO
SELL THE OPTION.
• Option Premium can be divided into two components: the
‘INTRINSIC VALUE’, and the ‘TIME VALUE’.
OPTION PREMIUM = INTRINSIC VALUE + TIME VALUE
• The intrinsic value is the value by which an option is in the

money. It is the difference of stock price & strike price.
• Intrinsic value of a call = max (0, Stock – Strike Price)
• Intrinsic value of a put = max (0, Strike Price – Stock)
HOW DO I USE DERIVATIVES IN MY
PORTFOLIO AND INVESTMENTS?
YOU CAN USE DERIVATIVES FOR
1. Hedging Risk and protection
2. Speculation and trading
3. Exploit arbitrage opportunities
STEP 1: Determine your market outlook
STEP 2: Choose a corresponding strategy
STEP 3: Follow up on the strategy
STRATEGY MATRIX
View Strategy
Bullish Strongly Buy futures
Buy out of the money call
Sell deep in money put
Sell call deep in money and buy more nos. of higher strike calls
Moderately Buy at the money call

Sell at the money put
Buy low strike price call and sell high strike price call
Buy low strike price put and sell high strike price put
Buy spot /futures and sell high strike price call
Buy spot/ futures and buy put
Mildly Buy deep in money call

Sell out of the money put
Buy spot /futures and sell at the money /high strike price call
STRATEGY MATRIX…CONTINUED
View Strategy
Bearish Strongly Sell futures
Sell deep in money call
Buy out of the money put

Sell put at higher strike price and buy more nos. of puts at lower price
Moderately Sell at the money call

Buy at the money put
Buy high strike price call/put and sell low strike price call/put
Mildly Sell out of the money call
Buy deep in money put

Buy spot/ futures and buy put
STRATEGY MATRIX…CONTINUED
View Strategy
Stable Sell near month call/put and buy far month call/put with same
strike price and at the money options
Sell one call and one put at the same strike price
Sell one call and one put different strike prices (out of the money)
Buy one call at P1 and one call at P3 and sell two call at P2
(where P1<P2<P3)
Uncertain but Buy one call and one put at the same strike price
volatile Buy one call and one put at different strike price
Strategy 1
Market Outlook: Bullish
Strategy: LONG (Buy) CALL
EXAMPLE: Initiated on 24th Jan
View: Bullish on Infosys Tech
Spot Price: Rs .2230/-
Strategy: Bought INFOSYSTECH 2250 Feb CA @ Rs.45
(Lot size = 100)
Result: In about a weeks’ time, the call option appreciated
to Rs.70 as the stock price rose and we sold off the
position resulting in a profit. A graphical
representation of this option position is given in the
next slide
Payoff Profile
Payoff Profile
14,000 00
12,000 00
10,000 00
8,000 00
Profit/Loss
6,000 00
4,000 00
2,000 00
0 00
-2,000 00 2,065 2,100 2,135 2,170 2,205 2,240 2,275 2,310 2,345 2,380 2,415
-4,000 00
-6,000 00
Infosys Tech at Expiry
BREAK EVEN POINT: Rs.2295, i.e., strike price + premium paid

MAXIMUM PROFIT: Unlimited
MAXIMUM LOSS: Rs.4500 per lot
Strategy 2
Market Outlook: Bearish to stagnant
Strategy: SHORT (Sell) CALL
EXAMPLE: Bearish on ACC and other cement stocks
View: Bearish on cement stocks
Strategy: Sold ACC 1050 Feb CA @ Rs.20 (Lot size = 375)
Result: Our conviction was right and cement stocks
trended downwards. We therefore kept the
premium that we collected which was our net
profit. A graphical representation of this option
position is given in the next slide.
Payoff Profile
Payoff Profile
10,000 00
5,000 00
0 00
Profit/Loss
-5,000 00 975 990 1,005 1,020 1,035 1,050 1,065 1,080 1,095 1,110 1,125
-10,000 00
-15,000 00
-20,000 00
-25,000 00
ACC at Expiry
BREAK EVEN POINT: Rs.1070, i.e., strike price + premium received

MAXIMUM PROFIT: Premium received
MAXIMUM LOSS: Unlimited
Strategy 3
Market Outlook: Bearish
Strategy: LONG (Buy) PUT
EXAMPLE: Initiated on 23rd February
View: Bearish on the NIFTY index
Spot value: 3930 levels
Strategy: Bought NIFTY 3900 Feb PA @ Rs.120 (Lot size =
50)
Result: The put option appreciated to Rs.134 as the index
fell and we sold off the position resulting in a
profit. A graphical representation of this option
position is given in the next slide.
Payoff Profile
Payoff Profile
4,000 00
2,000 00
0 00
Profit/Loss
3,700 3,750 3,800 3,850 3,900 3,950 4,000 4,050 4,100 4,150 4,200
-2,000 00
-4,000 00
-6,000 00
-8,000 00
Nifty at Expiry
BREAK EVEN POINT: 3780, i.e., strike price - premium paid

MAXIMUM LOSS: Rs.6000 per lot
Strategy 4
Market Outlook: Bullish to Stagnant
Strategy: SHORT (Sell) PUT
EXAMPLE: Initiated on 9th Feb
View: Bullish on SAIL
Strategy: Sold SAIL 110 Feb PA @ Rs. 2.50 (Lot size = 2700)
Result: This is one example where our strategy resulted in a
loss. Our outlook was wrong and SAIL stock fell along
with the general market. We had to buy back our put at a
higher price (at Rs.3.90) as the stock went down and
this resulted in a loss of Rs.1.40 per lot.
A graphical representation of this option position is
given in the next slide
Payoff Profile
Payoff Profile
8,000.00
6,000.00
4,000.00
Profit/Loss
2,000.00
0.00
-2,000.00 105 106 107 108 109 110 111 112 113 114 115
-4,000.00
-6,000.00
-8,000.00
SAIL at Expiry
BREAK EVEN POINT: Rs. 107.50, Strike price - Premium received

MAXIMUM PROFIT: Premium received
Strategy 5
Market Outlook: Moderately Bullish
Strategy: BULL SPREAD
(Buy a call and sell a call at a higher strike
OR buy a put and sell a put at a higher
strike)
EXAMPLE: Initiated on 31st Jan
View: Bullish on SBI
Strategy: Buy SBI 1140 Feb CA @ Rs.42 (Lot size = 250)
Sell SBI 1230 Feb CA @ Rs.10 (Lot size = 250)
Result: After executing this strategy, SBI rallied higher and we realized
a net profit in this strategy. We sold the 1140 call for Rs.85 and
bought back the 1230 call for Rs.32, hence resulting in a net
profit of Rs.21 per lot.
A graphical representation of this option position is given in
the next slide.
Payoff Profile
Payoff Profile
20,000 00
15,000 00
10,000 00
Profit/Loss
5,000 00
0 00
890 940 990 1,040 1,090 1,140 1,190 1,240 1,290 1,340 1,390
-5,000 00
-10,000 00
SBI at Expiry
BREAK EVEN POINT: Rs.1172

MAXIMUM PROFIT: Rs.14,500 per lot (250 x 58)
MAXIMUM LOSS: Rs.8000 per lot (250 x 32)
Strategy 6
Market Outlook: Moderately Bearish
Strategy: BEAR SPREAD
(Buy a put and sell a put at a lower strike
OR buy a call and sell a call at a lower strike)
EXAMPLE: Initiated on 12th Feb

View: Bearish on NIFTY
Spot Value: 4100 levels
Strategy: Buy NIFTY Feb 4100 PE @ Rs.52 (Lot size = 50)
Sell NIFTY Feb 4000 PE @ Rs.28 (Lot size = 50)
Result: Nifty headed lower after this strategy and the puts
increased in value. We sold the 4100 put for Rs.104 and
bought back the 4000 put for Rs.51, resulting in a net
profit of Rs.29 per lot. A graphical representation of this
option position is given in the next slide.
Payoff Profile
Payoff Profile
5,000.00
4,000.00
3,000.00
Profit/Loss
2,000.00
1,000.00
0.00
-1,000.00 3,850 3,900 3,950 4,000 4,050 4,100 4,150 4,200 4,250 4,300 4,350
-2,000.00
Nifty at Expiry
BREAK EVEN POINT: Rs.4076

MAXIMUM PROFIT: Rs.3800 per lot (50 x 76), Nifty below 4000
MAXIMUM LOSS: Rs.1200 per lot (50 x 24), Nifty above 4100
Strategy 7
Market Outlook: Highly Volatile
Strategy: LONG (Buy) STRANGLE
(Buy an equal number of calls and puts at
different strike prices and same expiry)
EXAMPLE: Initiated on 9th April

View: INFOSYSTECH is reporting its earnings on Friday, 13th April.
A significant move to the up or downside depending upon the
results could occur. Therefore one can enter a strangle position.
Spot Price: 2040 levels
Strategy: Buy INFOSYSTECH Apr 2100 CA @ Rs.42 (Lot size = 100)
Buy INFOSYSTECH Apr 1920 PA @ Rs.34 (Lot size = 100)
Result: This strategy was initiated on Monday and both the legs are still
open as the result is due tomorrow. If a good move occurs in
any one direction, the strategy should span out well. The initial
outflow for this strategy was Rs.8000.
Payoff Profile
Payoff Profile
25,000.00
20,000.00
15,000.00
Profit/Loss
10,000.00
5,000.00
0.00
-5,000.00 1,610 1,688 1,766 1,844 1,922 2,000 2,078 2,156 2,234 2,312 2,390
-10,000.00
INFOSYSTECH at Expiry
BREAK EVEN POINTS: 2176, i.e., upper strike price + premiums paid
1844, i.e., lower strike price – premiums paid
MAXIMUM LOSS: Total premium amount paid
Strategy 8
Market Outlook: Stagnant to range-bound
Strategy: SHORT (Sell) STRANGLE
(Sell an equal number of calls and puts at
different strike prices and same expiry)
EXAMPLE: ITC
View: Range bound
Spot Price: 170 levels
Strategy: Sell ITC 180 Mar CA @ Rs.4 (Lot size = 675)
Sell ITC 160 Mar PA @ Rs.7 (Lot size = 675)
Result: ITC remained range-bound and the premiums
collected were realized as net profit.
Payoff Profile
Payoff Profile
20,000.00
10,000.00
0.00
Profit/Loss
120 130 140 150 160 170 180 190 200 210 220
-10,000.00
-20,000.00
-30,000.00
-40,000.00
ITC at Expiry
BREAK EVEN POINTS: 191, i.e., upper strike price + premiums received
149, i.e., lower strike price – premiums received
MAXIMUM PROFIT: Limited to the premiums received
More Strategies
1. Covered Call: Own stock/futures, sell a higher call
2. Protective Put: Own stock/futures, buy a put option
3. Ratio Call Spread: Buy a call, sell two higher strike calls
4. Ratio Put Spread: Buy a put, sell two lower strike puts
5. Long Straddle: Buy a call and a put for the same strike price and
expiry.
6. Short Straddle: Sell a call and a put for the same strike price and
expiry.
DEMO IN
optionsXpress
TECHNICAL ANALYSIS BASICS
VARIOUS INDICATORS, TECHNIQUES AND
MECHANISMS TO MEASURE MARKET
SENTIMENT IN THE BEST POSSIBLE WAY
All technical analysis indicators are derived from ONLY FIVE DATA
POINTS. They are:
OPENING PRICE, CLOSING PRICE, HIGH PRICE, LOW PRICE AND VOLUME
BECAUSE FOR ANY GIVEN PERIOD, THE A STOCK GIVES

ONLY FIVE DATA POINTS
TECHNICAL ANALYSIS BASICS
The way I look at technical analysis is simple: It’s going
from a 50:50 chance of picking the right stock to 60:40
then 70:30 then 80:20 by adding indicators…But you
can NEVER be 100 percent sure about the move a stock
will make.
TECHNICIAL ANALYSIS IS ADVISALBE FOR
1. Day trading and swing trading
2. Deciding exit and entry points
3. Helping gauge the stock’s or the market’s short-medium term
sentiment
4. Combining with derivative strategy making process
5. NOT ADVISABLE for long term investors and
buy-and-holders www.AdhvithDhuddu.com
TECHNICAL ANALYSIS: BASIC INDICATORS
SOME BASIC TECHNICAL ANALYSIS INDICATORS

(I) Chart Formations
1. Support Level
2. Resistance Level DEMO IN
3. Channel formation
4. Upward or downward channel
THINKORSWIM
5. Double top formation SOFTWARE AND
6. Double bottom formation
7. Ascending Triangle
FINVIZ
8. Descending Triangle
TECHNICAL ANALYSIS: BASIC INDICATORS
SOME BASIC TECHNICAL ANALYSIS INDICATORS

(II) Momentum Indicators
1. Stochastic Indicator
2. Relative Strength Indicator or RSI DEMO IN
3. More indicators will be shown in
the demo.
THINKORSWIM
SOFTWARE AND
FINVIZ
DERIVATIVES IN THE NEWS RECENTLY
• The leverage factor and the financial crisis
• OTC derivatives and normal derivatives
• Lehman Brothers and Bear Stearns
• John Paulson and the $20 billion dollar trade:
Article in the Wall Street Journal
• “Over the counter, out of sight” --- An
incredible article in The Economist about
how derivatives aggravated the financial
crisis and what’s being done about it.
THANK YOU
ADHVITH DHUDDU
Website: www.AdhvithDhuddu.com
www.AliveNow.in
E-mail: adhvithd@gmail.com or adhvith@alivenow.in
Phone: +91-9740247446

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PRESENTATION ON DERIVATIVES

AND TECHNICAL ANALYSIS

WHICH IS THE LARGEST

THE WORLD’S MOST RENOWNED

CAN ANYONE TELL ME

A derivative is a financial instrument

TEXT BOOK DEFINITION FOR FUTURE

Based on Right to Exercise

Based on Time to Exercise

• The intrinsic value is the value by which an option is in the

Moderately Buy at the money call

Mildly Buy deep in money call

Sell deep in money call

Buy out of the money put

Moderately Sell at the money call

Mildly Sell out of the money call

Buy deep in money put

BREAK EVEN POINT: Rs.2295, i.e., strike price + premium paid

BREAK EVEN POINT: Rs.1070, i.e., strike price + premium received

BREAK EVEN POINT: 3780, i.e., strike price - premium paid

BREAK EVEN POINT: Rs. 107.50, Strike price - Premium received

BREAK EVEN POINT: Rs.1172

EXAMPLE: Initiated on 12th Feb

BREAK EVEN POINT: Rs.4076

EXAMPLE: Initiated on 9th April

BECAUSE FOR ANY GIVEN PERIOD, THE A STOCK GIVES

SOME BASIC TECHNICAL ANALYSIS INDICATORS

SOME BASIC TECHNICAL ANALYSIS INDICATORS

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