Tag: University of Mumbai BMS Notes

Parallel bargaining is bargaining in which unions negotiate provisions covering wages and other benefits that are similar to those provided in other agreements within the industry or region. It is also called pattern bargaining.

In parallel or pattern bargaining, a union determines a sequence for negotiations with firms within an industry where the agreement with the first firm becomes the take-it-or-leave-it offer by the union for all subsequent negotiations. For example, a union might target company, push hard for the best contract it could get and declare the new terms to be the “pattern.” If the other companies in that industry didn’t follow suit, labor unrest would likely follow.

Pattern bargaining is a process in labour relations, where a trade union gains a new and superior entitlement from one employer and then uses that agreement as a precedent to demand the same entitlement or a superior one from other employers.

In the United States, pattern bargaining was pioneered by unions such as the United Auto Workers and the Teamsters. The first step of the bargaining process is the identification of a target employer that is most likely to agree to a favourable employment contract. For the selected company, this provides an opportunity to influence the contract for the industry, while the downside is the risk of a labour disruption if negotiations stall or fail. Once this contract has been successfully negotiated and ratified by the unionized workers, the union declares it a “pattern agreement” and presents it to the other employers as a take-it-or-leave-it offer.

In Australia, pattern bargaining was specifically outlawed under the now-repealed WorkChoices legislation. The law was repealed by the Labor Party after their victory in the 2007 election, but Labor’s Fair Work Act, which came into force on 1 July 2010, still outlaws pattern bargaining.

For both union and management

1. Collective bargaining process should give due consideration to hear the problems on both sides. This will develop mutual understanding of a problem which is more important for arriving at the solutions.
2. Both the management and union should analyze the alternatives to arrive at the best solution.
3. There must be mutual respect on both the parties. The management should respect the unions and the unions should recognize the importance of management.
4. Both the union and management must have good faith and confidence in discussion and arriving at a solution.
5. Collective bargaining required effective leadership on both sides, on the union side and management side to moderate discussions and create confidence.
6. In collective bargaining both the union and management should observe the laws and regulations in practice in arriving at a solution.
7. In all negotiations, the labour should be given due consideration – in wage fixation, in working conditions, bonus etc.

For Management

1. Management should think of realistic principles and policies for labour regulations.
2. The recognitions of a trade union to represent the problems is more essential. If there are more than one union, the management can recognize on which is having the support of majority of workers. 
3. Management should follow a policy of goodwill, and cooperation in collective bargaining rather than an indifferent attitude towards the union.
4. Managements need not wait for trade union to represent their grievances for settlement. Management can voluntarily take measures to settle the grievances.

5. Managements should give due consideration to social and economic conditions of workers in collective bargaining.

For Unions 

1. Unions should avoid undemocratic practices.
2. Unions have to recognize their duties to the management also before emphasizing their demands.
3. Unions have to consider the benefits to all workers rather than a section of workers.
4. Strike lock-outs should be resorted to, only as a last measure. As far as possible they have to be avoided by compromise and discussion.

The Collective Bargaining is a technique to reach a mutual agreement between the employer and the employee. Here the representatives of both the parties viz. The union and the employer meet and discuss the economic issues such as wage, bonus, number of working hours and other employment terms.

The process of collective bargaining comprises of five steps that are followed by both the employee and the employer to reach an amicable solution.

• Preparation: At the very first step, both the representatives of each party prepares the negotiations to be carried out during the meeting. Each member should be well versed with the issues to be raised at the meeting and should have adequate knowledge of the labor laws.

The management should be well prepared with the proposals of change required in the employment terms and be ready with the statistical figures to justify its stand.

On the other hand, the union must gather adequate information regarding the financial position of the business along with its ability to pay and prepare a detailed report on the issues and the desires of the workers.

• Discuss: Here, both the parties decide the ground rules that will guide the negotiations and the prime negotiator is from the management team who will lead the discussion. Also, the issues for which the meeting is held, are identified at this stage.

 The issues could be related to the wages, supplementary economic benefits (pension plans, health insurance, paid holidays, etc.), Institutional issues(rights and duties, ESOP plan), Administrative issues (health and safety, technological changes, job security, working conditions).

• Propose: At this stage, the chief negotiator begins the conversation with an opening statement and then both the parties put forth their initial demands. This session can be called as a brainstorming, where each party gives their opinion that leads to arguments and counter arguments.
• Bargain: The negotiation begins at this stage, where each party tries to win over the other. The negotiation can go for days until a final agreement is reached. Sometimes, both the parties reach an amicable solution soon, but at times to settle down the dispute the third party intervenes into the negotiation in the form of arbitration or adjudication.
• Settlement: This is the final stage of the collective bargaining process, where both the parties agree on a common solution to the problem discussed so far. Hence, a mutual agreement is formed between the employee and the employer which is to be signed by each party to give the decision a universal acceptance.

Thus, to get the dispute settled the management must follow these steps systematically and give equal chance to the workers to speak out their minds.

Employee Relationship Management or ERM is the process of managing relationships in an organisation. These relationships can be between the organisation and employees as well as co-workers working at the same level.

For employees to be productive, they need to have a working environment that allows them to be creative. When employees have an easy-going relationship with others at work, it will show in their performance and productivity. There will be more communication, collaboration and cooperation.

An effectively managed ERM will pave the way for a fulfilling employee experience and a feeling of satisfaction from the work your employees do.

It is rightly said that the success and failure of an organization is directly proportional to the relationship shared among the employees. The employees must share a cordial relation otherwise they would always end up fighting with each other. Nothing is possible without trust. You need to trust people to expect the best out of them. Trust only comes when you are comfortable with the other person. An individual can’t always take decisions alone. Employees together can discuss things among themselves, come out with innovative ideas and accomplish the tasks at a much faster rate.

A human resource professional plays a key role in binding the employees together. He/she must undertake certain activities which help in strengthening the bond among the employees and bring them closer.

The individual taking care of the HR activities plays a key role in involving all the employees into something productive which would give them an opportunity to know each other well. Individuals are so engrossed in their daily routine work that they hardly get time to interact with each other. Many of them don’t even know the full names of the person sitting next to their workstations. The human resource department must ensure that several group activities are being organized at the workplace to bring all employees on a common platform.

Research says that if the employees are satisfied with their job responsibilities, they tend to remain happy and avoid conflicts with each other. Individuals develop a feeling of trust and loyalty towards their organization and don’t waste their time and energy in unproductive tasks.

Organize various activities like potlucks and small get togethers at the workplace. Ask each one to bring some dish according to his taste and convenience. Let the employees enjoy together. Employees tend to discuss lot many things apart from routine work in these kinds of informal get togethers.

One day probably the last day of the month should be earmarked with the sole objective of celebrating birthdays falling in the particular month. For example all those born in the month of May should celebrate their birthdays together on the last day of the month i.e. 31st May which will help a great deal for them to remain charged for next one year. The HR should send a formal mail inviting all. Let everyone enjoy and have fun. Divide individuals into groups and ask each group to do something. One group can probably be responsible for the decoration of the venue; the other group can take care of the cake as well as other eatables and so on. The HR person should ideally support each group to ensure that no one faces any difficulty in getting things organized.

It is the responsibility of the human resources team to organize various events like sports day, annual day, green day etc. The employees must be encouraged to participate in these kinds of extracurricular activities. Employees are able to relax this way and take a break from their routine work. Problems crop up when the work tends to become monotonous. Employees should enjoy coming to office, rather than treating work as a burden.

The HR in coordination with the team leaders must display the names of the top performers every month on the company’s noticeboard. Send a congratulations mail as well. The human resource professional along with the supervisor can even hand over a small trophy as a token of appreciation to the top performers. Do this activity in the presence of all. The one who has performed well starts trusting his management more and strives hard to win many more trophies in the future. Everyone is aware about each other’s performance and gets inspired as well.

While making the organization’s policies, the human resource department must fix a common time for lunch for all the employees. Assign half an hour for the same and make sure that no one during the lunch time is seen working at their workstations. Everyone should come together at the office canteen and take lunch together. When people sit together, half of their problems disappear on their own. Employees share their sorrows, displeasures and various other problems with their colleagues and this way come closer to each other. People develop better bonding this way.

When a new employee joins an organization, make sure he receives a warm welcome by all. The induction program should be conducted at the auditorium or the conference room so that everyone can be invited. Ask the new joinee to introduce himself well. Let others know that a new member has stepped into their family to help them in their assignments.

The HR along with the line managers must communicate the key responsibility areas clearly to the employees to extract the best out of them and avoid dissatisfactions later.

Value at Risk (VaR) is a financial metric that estimates the risk of an investment. More specifically, VaR is a statistical technique used to measure the amount of potential loss that could happen in an investment portfolio over a specified period of time. Value at Risk gives the probability of losing more than a given amount in a given portfolio.

Key Elements of Value at Risk

• Specified amount of loss in value or percentage
• Time period over which the risk is assessed
• Confidence interval

Methods Used for Calculating VaR

1. Historical Method

The historical method is the simplest method for calculating Value at Risk. Market data for the last 250 days is taken to calculate the percentage change for each risk factor on each day. Each percentage change is then calculated with current market values to present 250 scenarios for future value. For each of the scenarios, the portfolio is valued using full, non-linear pricing models. The third worst day selected is assumed to be 99% VaR.

Where:

vi is number of variables on day i

m is the number of days from which historical data is taken

2. Parametric Method

The parametric method is also known as the variance-covariance method. This method assumes a normal distribution in returns. Two factors are to be estimated an expected return and a standard deviation. This method is best suited to risk measurement problems where the distributions are known and reliably estimated. The method is unreliable when the sample size is very small.

Let loss be ‘l’ for a portfolio ‘p’ with ‘n’ number of instruments.

3. Monte Carlo Method

Under the Monte Carlo method, Value at Risk is calculated by randomly creating a number of scenarios for future rates using non-linear pricing models to estimate the change in value for each scenario, and then calculating the VaR according to the worst losses. This method is suitable for a great range of risk measurement problems, especially when dealing with complicated factors. It assumes that there is a known probability distribution for risk factors.

Marginal Value at Risk (MVaR)

The marginal value at risk (MVaR) method is the amount of additional risk that is added by a new investment in the portfolio. MVaR helps fund managers to understand the change in a portfolio due to the subtraction or addition of a particular investment. An investment may individually have a high Value at Risk, but if it is negatively correlated with the portfolio, it may contribute a relatively much lower amount of risk to the portfolio than its standalone risk.

Incremental Value at Risk

Incremental VaR is the amount of uncertainty added to, or subtracted from, a portfolio due to buying or selling of an investment. Incremental VaR is calculated by taking into consideration the portfolio’s standard deviation and rate of return, and the individual investment’s rate of return and portfolio share. (The portfolio share refers to what percentage of the portfolio the individual investment represents.)

Conditional Value at Risk (CVaR)

This is also known as the expected shortfall, average value at risk, tail VaR, mean excess loss, or mean shortfall. CVaR is an extension of VaR. CVaR helps to calculate the average of the losses that occur beyond the Value at Risk point in a distribution. The smaller the CVaR, the better.

Advantages of Value at Risk (VaR)

1. Easy to understand

Value at Risk is a single number that indicates the extent of risk in a given portfolio. Value at Risk is measured in either price units or as a percentage. This makes the interpretation and understanding of VaR relatively simple.

2. Applicability

Value at Risk is applicable to all types of assets – bonds, shares, derivatives, currencies, etc. Thus, VaR can be easily used by different banks and financial institutions to assess the profitability and risk of different investments, and allocate risk based on VaR.

3. Universal

The Value at Risk figure is widely used, so it is an accepted standard in buying, selling, or recommending assets.

Limitations of Value at Risk

1. Large portfolios

Calculation of Value at Risk for a portfolio not only requires one to calculate the risk and return of each asset but also the correlations between them. Thus, the greater the number or diversity of assets in a portfolio, the more difficult it is to calculate VaR.

2. Difference in methods

Different approaches to calculating VaR can lead to different results for the same portfolio.

3. Assumptions

Calculation of VaR requires one to make some assumptions and use them as inputs. If the assumptions are not valid, then neither is the VaR figure.

The transactions in secondary market are processed through three distinct phases, viz. trading, clearing and settlement. While the stock exchange provides the platform for trading to its trading members, the clearing corporation determines the funds and securities obligations of the trading members and ensures that trading members meet their obligations.

The clearing banks and depositories provide the necessary interface between the custodians/clearing members (who clear for the trading members or their own transactions) for settlement of funds and securities obligations of trading members.

Stock Exchange

The clearing process involves determination of what counter-parties owe, and what counter-parties are due to receive on the settlement date. It is essentially the process of determination of obligations, after which the obligations are discharged by settlement. To illustrate, the clearing and settlement process for transactions in securities on NSE is presented.

Several entities, like clearing corporation, clearing members, custodians, clearing banks, depositories, are involved in the process of clearing. The roles of each of these entities are explained below:

i) Clearing Corporation:

The clearing corporation is responsible for post-trade activities of a stock exchange. Clearing and settlement of trades and risk management are the central functions for a clearing corporation.

ii) Clearing Members:

Clearing members can be of two types: (i) those who are trading as well as clearing members; these members trade as well as take the responsibility to settle their trades, and (ii) those who act only as clearing members; these members do not trade but take on the responsibility to settle the trades of other trading members. They are responsible for settling their obligations as determined by the clearing corporation. They have to make available funds and/or securities in the clearing account or pool account, as the case may be, to meet their obligations on the settlement day.

iii) Custodians:

Custodians are clearing members but not trading members. They settle trades on behalf of other trading members. A trading member may assign a particular trade to a custodian for settlement. The custodian is required to confirm whether he is going to settle that trade or not. If it confirms to settle that trade, then clearing corporation assigns that particular obligation to that custodian and the custodian is required to settle it on the settlement day.

iv) Clearing Banks:

Clearing banks are a key link between the clearing members and clearing corporation for funds settlement. Every clearing member is required to open a dedicated clearing account with one of the clearing banks. Based on the clearing member’s obligation as determined through clearing, the clearing member makes funds available in the clearing account for the pay-in and receives funds in case of a pay-out.

v) Depositories:

Depository helps in the settlement of the dematerialised securities. It holds dematerialised securities of the investors in the beneficiary accounts. Each clearing member is required to maintain a clearing pool account with all the depositories. Separate accounts are required to be opened for the settlement of trades on different stock exchanges.

The clearing members are required to provide the securities as per their obligations in the clearing pool account on settlement day. At a pre-determined time, the depository sends the information about the availability of securities in the clearing pool accounts of the clearing member to the clearing corporation.

In stock market there is strong relationship between risk and return. Greater the risk, greater the return generally! In financial terminology risk management is the process of identifying and assessing the risk and then developing strategies to manage and minimize the same while maximizing the returns.

Every investment demands a certain amount of risk and for an investor to assume this risk he has to be compensated duly. This compensation is in the form of something called as the risk premium or simply the premium. Risk is therefore central to stock markets or investing because without risk there can be no gains. Successful investors use stock market risk management strategies to minimize the risk and maximize the gain.

In financial markets there are generally two types of risk; first the Market risk and second the Inflation risk. Market risk results from a possibility in increase or decrease of financial markets. The other risk i.e. the Inflation or the purchasing power risk results from rise and fall of prices of goods and services over time.

The inflation risk is an important consideration in long term investments where as the market risk is more relevant in the short term. It is the market risk that can be managed and controlled to a certain extent, inflation risk cannot be controlled.

There are certain strategies that can be employed to mitigate the risk in a stock market. The strategies are as follows:

• Follow the trend of the market: This is one of the proven methods to minimize risks in a stock market. The problem is that, it is difficult to spot trends in the market and trends change very fast. A market trend may last a single day, a month or a year and again short-term trends operate within long term trends.
• Portfolio Diversification: Another useful risk management strategy in the stock market is to diversify your risk by investing in a portfolio. In a portfolio you diversify your investment to several companies, sectors and asset classes. There is a probability that while the market value of a certain investment decreases that of the other may increase. Mutual Funds are yet another means to diversify the impact.
• Stop Loss: Stop loss or trailing tool is yet another device to check that you don’t lose money should the stock go far a fall. In this strategy the investor has the option of making an exit if a certain stock falls below a certain specified limit. Self-discipline is yet another option employed by some investors to sell when the stock falls below a certain level or when there is a steep fall.

Portfolio diversification

Businesses are susceptible to several uncertainties that adversely affect their stock prices. To protect your portfolio from big losses, invest in multiple stocks. This ensures that even if some of your investments do not perform as expected, the others minimise their effect on the overall portfolio. While diversifying, make sure to invest in stocks that don’t have much in common. Investing in similar stocks exposes you to the same risks and defeats the purpose of diversification. For example, automobile and auto ancillary may seem like different sectors, but they are affected by similar factors. Investing in both these sectors may not help much with risk mitigation.

Remember, diversification does not mean investing equally in all sectors. It means investing in more than one asset or sector.

You can invest more in companies you are more optimistic about. But don’t commit so much that you cannot bear the losses if things go bad.

Using stop-losses

A stop-loss order authorizes your broker to automatically sell a stock when it falls to a specific level. This protects you from excessive losses during sharp market corrections. It also checks your tendency to sit on a loss-making stock for too long in the hope that it rebounds. For example, if you bought a stock for Rs.100 with a stop-loss of Rs.90, your broker will automatically sell the stock when it falls to Rs.90. This can protect you from further losses if the stock falls below Rs.90.

Adding non-cyclical to the portfolio

These are stocks of companies that sell essential goods and, as such, are relatively insulated from economic cycles. Examples include pharmaceutical and Fast-Moving Consumer Goods (FMCG) stocks. Why you wonder? This is because people cannot stop spending on healthcare and groceries, irrespective of the state of the economy. At best, they may reduce their spending on some essential goods and services. As such, non-cyclical stocks have relatively stable revenues, which translate into stable stock prices. You may find many experts call them ‘Defensives’.

Hedging

Hedging refers to the use of derivative instruments, such as Futures and Options contracts, for risk management in equity. A futures contract helps you to fix the price for a future buy/sell transaction in the future. This way, you can cut down the risk of price fluctuations. For example, even if the price of your stock falls, you can sell it at the higher price that you fixed. Similarly, you can buy at lower rates even if the price rises thanks to derivatives contracts. There are different types of such derivatives contracts that you can use. We’ll read about these in depth in the Derivatives section.

Investing in dividend-paying stocks

Companies that have a history of consistent dividend payments are usually strong, established companies. Adding them to your portfolio can shield you from equity risk.

Companies are generally reluctant to cut their dividends because the market perceives a dividend cut as a sign of poor financial health. As such, dividend-paying stocks also ensure that you receive a constant stream of returns, even if their prices fall. They reduce risk by bringing more predictability and stability to your portfolio.

Opting for blue-chips

Not all stocks have the same risk. Stocks of smaller or medium-sized companies can be riskier and more volatile in the stock market. This is because such companies are more prone to various business risks. Established companies, meanwhile, can be more stable. This extends to their stock prices too. So, you can reduce risk by opting for such stocks.

Pairs trading

This is a good way to mitigate equity risk when you are anticipating a big price move, but are not sure of its direction. An example is when a big regulatory decision is expected to be made, but you don’t know what the decision will be. In such cases, you simultaneously buy the stock of one company and short sell (i.e. sell first and cover by buying later) the stocks of another company from the same sector. Ensure that both stocks are not related and are likely to benefit in different ways.

Initial Margin

Initial Margin is also called SPAN Margin. NSCCL (Clearing Corporation of NSE) and ICCL (Clearing Corporation of BSE) collects initial margin up-front for all the open positions of a Clearing Member (CM) based on the margins computed by SPAN Software. A CM is in turn required to collect the initial margin from the Trading Member (TMs generally known as Stock Broker) and his respective clients. Similarly, a TM should collect upfront margins from his clients.

Initial margin requirements are based on 99% value at risk over a one day time horizon. However, in the case of futures contracts (on index or individual securities), where it may not be possible to collect mark to market settlement value, before the commencement of trading on the next day, the initial margin is computed over a two-day time horizon, applying the appropriate statistical formula. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time.

Initial margin requirement for a member:

1. For client positions: Is netted at the level of individual client and grossed across all clients, at the Trading/Clearing Member level, without any setoffs between clients.
2. For proprietary positions: Is netted at Trading/Clearing Member level without any setoffs between client and proprietary positions.

Premium Margin

In addition to Span Margin, Premium Margin is charged to members. The premium margin is the client wise premium amount payable by the buyer of the option and is levied till the completion of pay-in towards the premium settlement.

Assignment Margin

Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. It is levied on assigned positions of CMs towards interim and final exercise settlement obligations for option contracts on index and individual securities till the pay-in towards exercise settlement is complete.

The Assignment Margin is the net exercise settlement value payable by a Clearing Member towards interim and final exercise settlement and is deducted from the effective deposits of the Clearing Member available towards margins.

Initial Margin requirement = Total SPAN Margin Requirement + Buy Premium + Assignment Margin

Exposure Margin

The exposure margins for options and futures contracts on index are as follows:

For Index options and Index futures contracts:

3% of the notional value of a futures contract. In case of options it is charged only on short positions and is 3% of the notional value of open positions.

For option contracts and Futures Contract on individual Securities:

The higher of 5% or 1.5 standard deviation of the notional value of gross open position in futures on individual securities and gross short open positions in options on individual securities in a particular underlying. The standard deviation of daily logarithmic returns of prices in the underlying stock in the cash market in the last six months is computed on a rolling and monthly basis at the end of each month.

Additional Exposure Margin

Effective from February 2018, immediately the day after the expiry of February 2018 contracts , levying additional exposure margin based on Market Wide Position Limit has been started. The change in exposure margin shall be applicable from next trading day and shall be applicable till the open interest in the security reduces to below 70% of MWPL at end of the day.

For this purpose notional value means:

• For a futures contract: The contract value at last traded price/closing price.
• For an options contract: The value of an equivalent number of shares as conveyed by the options contract, in the underlying market, based on the last available closing price.

In case of calendar spread positions in futures contract, exposure margins are levied on one third of the value of open position of the far month futures contract. The calendar spread position is granted calendar spread treatment till the expiry of the near month contract.

Initial Margin requirement = Total SPAN Margin Requirement + Buy Premium + Assignment Margin+ Exposure Margin + Additional Exposure Margin

Option strategies are the simultaneous, and often mixed, buying or selling of one or more options that differ in one or more of the options’ variables. Call options, simply known as calls, give the buyer a right to buy a particular stock at that option’s strike price. Conversely, put options, simply known as puts, give the buyer the right to sell a particular stock at the option’s strike price. This is often done to gain exposure to a specific type of opportunity or risk while eliminating other risks as part of a trading strategy. A very straightforward strategy might simply be the buying or selling of a single option; however, option strategies often refer to a combination of simultaneous buying and or selling of options.

Options strategies allow traders to profit from movements in the underlying assets based on market sentiment (i.e., bullish, bearish or neutral). In the case of neutral strategies, they can be further classified into those that are bullish on volatility, measured by the lowercase Greek letter sigma (σ), and those that are bearish on volatility. Traders can also profit off time decay, measured by the uppercase Greek letter theta (Θ), when the stock market has low volatility. The option positions used can be long and/or short positions in calls and puts.

Bullish strategies

Bullish options strategies are employed when the options trader expects the underlying stock price to move upwards. They can also use Theta (time decay) with a bullish/bearish combo called a Calendar Spread, when sideways movement is expected. The trader may also forecast how high the stock price may go and the time frame in which the rally may occur in order to select the optimum trading strategy for buying a bullish option.

The most bullish of options trading strategies, used by most options traders, is simply buying a call option.

The market is always moving. It’s up to the trader to figure out what strategy fits the markets for that time period. Moderately bullish options traders usually set a target price for the bull run and utilize bull spreads to reduce cost or eliminate risk altogether. There is limited risk trading options by using the appropriate strategy. While maximum profit is capped for some of these strategies, they usually cost less to employ for a given nominal amount of exposure. There are options that have unlimited potential to the up or down side with limited risk if done correctly. The bull call spread and the bull put spread are common examples of moderately bullish strategies.

Mildly bullish trading strategies are options that make money as long as the underlying asset price does not decrease to the strike price by the option’s expiration date. These strategies may provide downside protection as well. Writing out-of-the-money covered calls is a good example of such a strategy. The purchaser of the covered call is paying a premium for the option to purchase, at the strike price (rather than the market price), the assets you already own. This is how traders hedge a stock that they own when it has gone against them for a period of time.

Bearish strategies

Bearish options strategies are employed when the options trader expects the underlying stock price to move downwards. It is necessary to assess how low the stock price can go and the time frame in which the decline will happen in order to select the optimum trading strategy. Selling a Bearish option is also another type of strategy that gives the trader a “credit”. This does require a margin account.

The most bearish of options trading strategies is the simple put buying or selling strategy utilized by most options traders.

The market can make steep downward moves. Moderately bearish options traders usually set a target price for the expected decline and utilize bear spreads to reduce cost. This strategy has limited profit potential, but significantly reduces risk when done correctly. The bear call spread and the bear put spread are common examples of moderately bearish strategies.

Mildly bearish trading strategies are options strategies that make money as long as the underlying asset does not rise to the strike price by the options expiration date. However, you can add more options to the current position and move to a more advanced position that relies on Time Decay “Theta”. These strategies may provide a small upside protection as well. In general, bearish strategies yield profit with less risk of loss.

Neutral or non-directional strategies

Neutral strategies in options trading are employed when the options trader does not know whether the underlying asset’s price will rise or fall. Also known as non-directional strategies, they are so named because the potential to profit does not depend on whether the underlying price will increase or decrease. Rather, the correct neutral strategy to employ depends on the expected volatility of the underlying stock price.

Examples of neutral strategies are:

• Guts: Buy (long gut) or sell (short gut) a pair of ITM (in the money) put and call (compared to a strangle where OTM puts and calls are traded);
• Butterfly: A neutral option strategy combining bull and bear spreads. Long butterfly spreads use four option contracts with the same expiration but three different strike prices to create a range of prices the strategy can profit from.
• Straddle: An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration date, paying both premiums (long straddle)
• Strangle: Where you buy a put below the stock and a call above the stock, with profit if the stock moves outside of either strike price (long strangle).
• Risk reverse: Simulates the motion of an underlying so sometimes these are referred as synthetic long or synthetic short positions depending on which position you are shorting;
• Collar: Buy the underlying and then simultaneous buying of a put option below current price (floor) and selling a call option above the current price (cap);
• Fence: Buy the underlying then simultaneous buying of options either side of the price to limit the range of possible returns;
• Iron butterfly: Sell two overlapping credit vertical spreads but one of the verticals is on the call side and one is on the put side;
• Iron condor: The simultaneous buying of a put spread and a call spread with the same expiration and four different strikes. An iron condor can be thought of as selling a strangle instead of buying and also limiting your risk on both the call side and put side by building a bull put vertical spread and a bear call vertical spread;
• Jade Lizard: A bull vertical spread created using call options, with the addition of a put option sold at a strike price lower than the strike prices of the call spread in the same expiration cycle;
• Calendar spread: The purchase of an option in one month and the simultaneous sale of an option at the same strike price (and underlying) in an earlier month, for a debit

Bullish on volatility

Neutral trading strategies that are bullish on volatility profit when the underlying stock price experiences big moves upwards or downwards. They include the long straddle, long strangle, long condor (Iron Condor), long butterfly, and long Calendar.

Bearish on volatility

Neutral trading strategies that are bearish on volatility profit when the underlying stock price experiences little or no movement. Such strategies include the short straddle, short strangle, ratio spreads, short condor, short butterfly, and short calendar.

Option strategy profit / loss chart

A typical option strategy involves the purchase / selling of at least 2-3 different options (with different strikes and / or time to expiry), and the value of such portfolio may change in a very complex way.

One very useful way to analyze and understand the behavior of a certain option strategy is by drawing its Profit / Loss graph.

An option strategy profit / loss graph shows the dependence of the profit / loss on an option strategy at different base asset price levels and at different moments in time.

Option Strategies

1. Orientation

Setting the context Before we start this module on Option Strategy.

2. Bull Call Spread

Background The spread strategies are some of the simplest option strategies that a trader can implement. Spreads are multi leg strategies involving 2 or more options.

3. Bull Put Spread

Why Bull Put Spread? Similar to the Bull Call Spread, the Bull Put Spread is a two leg option strategy invoked when the view on the market is ‘moderately bullish’.

4. Call Ratio Back Spread

Background The Call Ratio Back Spread is an interesting options strategy. I call this interesting keeping in mind the simplicity of implementation and the kind of pay off it offers the trader.

5. Bear Call Ladder

Background The ‘Bear’ in the “Bear Call Ladder” should not deceive you to believe that this is a bearish strategy. The Bear Call Ladder is an improvisation over the Call ratio back spr.

6. Synthetic Long & Arbitrage

Background Imagine a situation where you would be required to simultaneously establish a long and short position on Nifty Futures, expiring in the same series.

7. Bear Put Spread

Spreads versus naked positions Over the last five chapters we’ve discussed various multi leg bullish strategies. These strategies ranged to suit an assortment of market outlook – from.

8. Bear Call Spread

Choosing Calls over Puts Similar to the Bear Put Spread, the Bear Call Spread is a two-leg option strategy invoked when the view on the market is ‘moderately bearish’. The Bear Call Spread.

9. Put Ratio Back spread

Background We discussed the “Call Ratio Back spread” strategy extensively in chapter 4 of this module. The Put ratio back spread is similar except that the trader invokes this when he is b ..

10. The Long Straddle

The directional dilemma How many times have you been in a situation wherein you take a trade after much conviction, either long or short and right after you initiate the trade the market move.

11. The Short Straddle

Context In the previous chapter we understood that for the long straddle to be profitable, we need a set of things to work in our favor, reposting the same for your quick reference – The vo ..

12. The Long & Short Strangle

Background If you have understood the straddle, then understanding the ‘Strangle’ is quite straightforward. For all practical purposes, the thought process behind the straddle and strangl ..

13. Max Pain & PCR Ratio

My experience with Option Pain theory in the never ending list of controversial market theories, the theory of ‘Option Pain’ certainly finds a spot. Option Pain, or sometimes referred to.

14. Iron Condor

New margin framework These are fascinating times we are living in, especially if you are an options trader in India Starting 1st June 2020, NSE’s new margin framework is live.